How Accommodate Works

A family member or friend may ask someone to act as a guarantor for a mortgage or personal or business loan. Lenders usually require a guarantor because they are unsure of the borrower's ability to repay the loan. In such cases, the lender will not advance the loan without a guarantor. An accommodate agreement or an accommodate loan works on a business level. The guarantor in this case is another business. This business will take responsibility for the borrower's credit liability. The guarantor should be alert to the reasons why the loan requires a guaranty agreement.

A bank or lender usually puts the accommodate agreement in writing and words it so that the guarantor's liability to the lender is the same as the borrower's liability. If the borrower defaults, the lender can take action against the guarantor without taking action against the borrower first. In accommodate guarantees, the guarantor also agrees to pay the lender for any of the lender's losses due to the borrower's default. This is called indemnification—the guarantor may have to reimburse the lender for any costs incurred by the lender to recover the borrower's loan. Such costs may include court and attorney fees, as well as fees payable to the collection agent. Interest on the loan, fees, and charges are normally also payable before the guarantor can make payments to the lender.

If there is more than one guarantor involved in the agreement, the lender is not obligated to require payment from all guarantors equally. The lender may require payment from only one guarantor or even from all but one guarantor. However, a joint guarantor may require the other guarantors to pay equitably. Certain legal presumptions can help guarantors. However, lenders are wise to these presumptions and the language in the security agreement usually expressly excludes them.

Example of an Accommodate

Looking at corporations—specifically subsidiary companies—an accommodation endorser is not always the parent company. It could be a company that has a close bond with the borrower. In addition, a larger company may provide an endorsement to one of its major suppliers. For example, a large clothing company may want to endorse one of its manufacturing partners.

Accommodate agreements frequently occur in Japanese companies, which use a keiretsu structure. This is when a group of companies participate in each other's shares and sometimes collaborate and share projects. Again, the strongest of these companies provide accommodation endorsements for other companies. Another illustration to cite as an example is a national bank that endorses one of its regional subsidiaries' promissory notes.

Significance of an Accommodate

Entering into an accommodate agreement is not the wisest business practice for guarantors. The lender can go after the guarantor rather than the debtor, especially if the accommodator has a lot of money or is easier to find than the debtor.

While the safest option may be not to sign a guaranty agreement, a potential guarantor can take steps to minimize risk. They may require the borrower to make an initial deposit so that the lender has additional security. Secondly, the guarantor can consider what additional information the borrower can provide to the lender so that the lender can reassess the need for the guarantee.

The guarantor has the right to demand repayment from the borrower only after the guarantor has paid the amount guaranteed to the lender. This is because the accommodate agreement typically states a limitation on the guarantor's exposure. However, a defaulting borrower may not be able to repay the guarantor. The guarantor must be aware that in the worst-case scenario, they may end up facing financial hardship or even bankruptcy.