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What is a Guarantee Fee?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 29 August 2016
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    Conjecture Corporation
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A guarantee fee is a fee that is paid to a guarantor by a debtor, in exchange for the guarantor’s pledge to honor a specific debt to a creditor in the event that the debtor is unable to settle that debt. The term also refers to a type of fee that is assessed by entities that provide mortgage-backed securities for the use of lenders. In this application, the guarantee fee often bundles in a number of support services that protect the interests of the lender, including selling the securities to investors, preparing reports that are routed to regulatory agencies as well as investors, and managing the pool of securities to best advantage.

Another form of the guarantee fee is found with imports of various products. In this application, the fee is paid in advance by a buyer as a form of pledge to settle the entire amount due once the shipment has arrived, cleared customs, and been inspected by the buyer. If the shipment complies with the terms of the order, the buyer then releases the full payment to the seller. Should the shipment not meet with the order terms, the buyer notifies the seller of the problem and allows ample time for the matter to be resolved. Depending on the laws that apply, the buyer may be able to recoup the guarantee fee if no resolution is possible.

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In all its incarnations, the business guarantee fee is designed to protect the interests of those who would extend some type of credit to others, as well as provide some degree of protection for individuals and businesses who receive those credit privileges. The use of this type of fee helps to decrease the amount of risk involved with the business deal, in that sellers or lenders have more assurance of being compensated even if the buyer or borrower should default on the contract. At the same time, the fees can aid a debtor in clearing an outstanding debt in the event that an extended illness or job loss makes it impossible to honor the debt obligation.

The amount of the guarantee fee will vary, based on several factors. In many cases, the credit rating of the debtor is one of the major considerations. The amount of money involved in the business dealing is also very important to determining the amount of the fee. In most cases, the fee is a percentage of the total amount, with allowances made for excellent or above average credit ratings. There are some situations where the fee is a fixed rate, regardless of the amount or the credit history of the debtor.

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