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What is a Business Guarantee?

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  • Written By: Marsha A. Tisdale
  • Edited By: J.T. Gale
  • Last Modified Date: 29 November 2016
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A business guarantee could refer to a guarantee, or promise, that a company’s product or service will be satisfactory. It could also refer to a loan to a business that is guaranteed either by a third party or by the government to safeguard the investor against the possible failure of the business. The owner of the business may give a personal guarantee when borrowing money that uses his or her personal assets as collateral for the business loan.

Generally, a personal guarantee can be required either by a bank or by another company that loans money to a business. This normally is required for start-up companies, companies that do not have a long enough or good enough credit history, or in the event the business plan is seen as risky. When a business owner gives a personal guarantee, it usually will increase the chance of getting the business loan, but he or she can lose personal assets if the business loan cannot be repaid from company profits.

A second type of business guarantee given by a bank is the financial bank guarantee. This is a bond that ensures the payment of both interest and payment of a business loan. The bond is backed by a third party that promises to pay in the event the original borrower defaults.

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In addition, a business could issue a "letter of guarantee" to one or more suppliers that acts as security to the supplier if payment obligations are not met. This decreases the potential risk to a supplier that ships to other business on the basis of a purchase order. On the other side, a bank can issue a performance bond that guarantees a specified amount to the purchaser if the selling company doesn’t meet its delivery promise. Either of these could be considered to be a business guarantee.

The Enterprise Finance Guarantee (EFG) is a program managed by the United Kingdom government that is a business guarantee designed to help small companies to acquire financing by facilitating bank loans. This program assists companies whose business is viable but unable to provide the security demanded by banks to obtain a business loan. Banks are still the decision makers as to whether a loan is given but the program encourages banks to make more loans because the bank's risk is lower. Borrowers pay the interest and principal to the bank as well as a quarterly fee to the government.

Another business guarantee is the money-back guarantee offered by companies to their customers. The company gives a product or service guarantee and promises to give the money back if the customer feels the product or service is unsatisfactory. In addition, a company can offer a price guarantee where if the customer finds the same product elsewhere for less money the company will pay the difference. Occasionally, companies will offer the additional incentive that if customers find a less expensive version of the product then the company will pay the difference plus 5 or 10 percent.

Sometimes it is the business, not the customer, that a guarantee is designed to help. For example, a check guarantee is a program where checks presented at a business will be verified before being accepted. If the check is not honored, it is the check guarantee company that collects the money from the customer and pays the original business where the check was cashed. In addition, one form of check guarantee is the check conversion where the check is converted to a debit transaction so that funds are electronically transferred from the customer’s bank account to the company’s bank account.

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