US Collateral and Guaranty Agreement

US Collateral and Guaranty Agreement is a contract wherein a guarantor promises to pay another’s debt or fulfill another person’s contractual obligation, if that other person fails to pay his debt or perform his obligation. It can either be a promise for the execution, completion, or existence of something or a promise or an assurance attesting to the quality or durability of a product or service.

The parties in guarantees refer to the people or entities that have to fulfill obligations in the collateral agreement. In many cases, the obligation in the loan guaranty agreement is paying back loaned money.

The parties in a US collateral agreement are:

The Lender: the person to whom an obligation is owed (like the payment of money).
The Debtor: the person who has to perform the obligation (pay back the lender).
The Guarantor: the person who agrees to perform the obligation (take over the loan payments) if the person who is supposed to do so (the debtor) fails to perform.

Purpose of US Collateral and Guaranty Agreement?

A loan guaranty benefits both the lender and the debtor. The benefit to the lender is that their loan is secure; it’s assured by the guarantor that the money will be paid back. The benefit to the debtor is that they are eligible for a loan that they might not have otherwise been able to receive without the assurance of the guarantor. This is often the case for debtors who have low credit scores.

Inclusions in US Collateral and Guaranty Agreement?

A loan guaranty agreement should ideally include the names of the parties, references to the original loan agreement if any, clarifications regarding the status of the parties as debtor, creditor and guarantor and other commercial and operational terms as required. Apart from the above, a US loan collateral agreement should also include standard boilerplate clauses such as waiver, remedies, notices, choice of law, dispute resolution and severability. While drafting the remedies clause, make sure that you outline all three parties’ remedies.

Key Terms of US Collateral and Guaranty Agreement?

The following are the key terms of a US collateral agreement:

Guarantee: Under a guarantee of payment, if the primary obligor defaults, the beneficiary can proceed directly against the guarantor, without first seeking to enforce its claims against the primary obligor.
Representations and Warranties: It is standard practice for the guarantor, under the representations and warranties section, to affirm that it has authority to enter into the agreement and is a duly organized and validly existing organization.
Subrogation of Rights: Subrogation provides for one party (in this case the guarantor) to stand in the shoes of another (the beneficiary), giving the substitute the same legal rights as those of the original party.
Binding Effect: Guarantees are contracts entered into between the guarantor and the beneficiary, thus consistent with a basic principle of contract law, a guarantee like any other contract must be supported by consideration.

[Also Read: Guarantee and Collateral Agreement]

Drafting of US Collateral and Guaranty Agreement?

The following guidelines should be followed for effective drafting of a collateral loan agreement template:

Ascertain the three parties and describe them correctly in the agreement.
Draft representations and warranties carefully. Make sure that facts such as title to the collateral and compliance with applicable laws are covered within the representations and warranties.
The collateral should be properly described and documented in the contract
Default events should be adequately described.
The process of invocation of collateral should also be captured in the agreement.
The value of the collateral should be mentioned in the contract.

Benefits of US Collateral and Guaranty Agreement?

The following are the advantages of using a Guarantee and Collateral Agreement:

A guarantee offers primary obligors some of the same protections as a letter of credit.
A guarantee may provide a primary obligor with the advantage of access to capital that it otherwise would be unable to obtain or may provide a more legally enforceable claim where perfected security interests in collateral are unavailable or problematic.
If the primary obligor does not have cash to offer as collateral for a local loan or if the pledge laws of the country where the primary obligor is located do not provide for mechanisms to perfect security interest in pools of intangible assets (such as microcredit portfolios), a guarantee from a development bank or from an organization may be an acceptable substitute.
In cases where unsecured financing is available to a primary obligor, the guarantee, allows the primary obligor to borrow at a lower interest rate.

Cons of US Collateral and Guaranty Agreement?

The following are the disadvantages of using a Guarantee and Collateral Agreement:

The guarantor may require the primary obligor to pay an initial and/or annual fee for the guarantee.
The guarantor may place certain restrictions on how the primary obligor may use the loan proceeds, such as prohibiting the primary obligor from engaging in any lending that the guarantor considers high risk.

A US collateral and guaranty agreement ensures that the creditor does not feel insecure as to the loan advanced by him. For this purpose, it brings in a third party that is the guarantor. The guarantor securitizes a collateral in order to enable the loan transaction to happen between the creditor and the debtor. Being a three party contract, A loan collateral agreement is susceptible to disputes. Typically, arbitration is resorted to in the event of any violation.