Loan guarantor motivation

[Charlotte Dunford]

What would motivate someone to be a commercial loan guarantor? The compensation? Equity position? The deal itself?

[Brian Burke]

Originally posted by @Caleb Heimsoth:

Something to consider here is that a non-recourse loan does not mean there's no recourse.  Even non-recourse loans have carve-outs, some of which can turn the entire loan to a full-recourse loan.

Just a couple of examples of carve-outs are:

• The owner absconds with the money that was supposed to be used to pay property taxes.  The guarantor is on the hook for the absconded money.
• The same thing could happen with funds that were intended to be used to renovate the property.
• If the borrower committed fraud in applying for the loan, the entire loan can turn recourse.
• If the borrower declares bankruptcy, the entire loan can turn recourse.

Certainly each loan is different and carve-outs vary, but just because it's a non-recourse loan doesn't mean that a guarantor gets to collect a fee and rest easy knowing that they aren't on the hook for anything.