Guaranties are common practice in the commercial lending industry. Typically, the borrower is a small corporation, limited liability company, or similar entity that is thinly capitalized with few (likely encumbered) assets. Under these circumstances, the borrower’s promise to pay a debt is cold comfort to a commercial lender in the event of a default, where its only source of recovery is likely to be the collateral it holds. For this reason, commercial lenders often condition loans not only on a security interest in the borrower’s property, but also on a separate, individual guaranty agreement executed by a third party, usually the principals of the corporate borrower. Such guaranties provide another avenue through which commercial lenders may recover loan amounts and damages due to the borrower’s default.
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