What is an Endorsement, and When Is It Required?

An endorsement is a guarantee of payment. Guarantees are usually required by banks when granting a loan or credit. The guarantor is the person who takes charge of the debt if the borrower (the person to whom the loan is granted) cannot meet the payment. 

An endorsement works like a guaranteed contract through which an entity trusts that a third party will comply with a financial obligation. When a guarantee is requested, it is intended to consolidate a guarantee that it will be collected. When a bank requests a guarantee from a person requesting a loan, the objective is to ensure that they will receive the money even if the person who has received the credit cannot meet the payments. 

Meaning and Definition of Endorsement

The obligation someone acquires to do what another person has committed to in case of non-compliance.” It is a definition written from such a general plan that we conveniently give it a spin to place the guarantee as a figure within the financial field where we are moving. The figure of endorsement that appears very frequently in financial terms is a term closely linked to loan and mortgage contracts, and even in some cases, it is also linked to real estate rental contracts. You may face one of these cases, so we recommend you continue reading this article. 

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According to the entity, a guarantee is “a way of guaranteeing or assuring the fulfillment of economic obligations.” Likewise, to provide a little more information to the public regarding this figure, the bank adds that “whoever guarantees (the guarantor) declares himself willing to meet the commitments of the guaranteed party (usually, the payment of a certain amount of money) against a third person or company (the beneficiary of the guarantee) in case the guaranteed does not do so.” 

Of the endorsement universe. In other words, the endorsement is a type of personal guarantee. In this sense, a third person agrees to assume another person’s debt against a specific lender. If the debtor does not comply with his financial obligation to the lender, the guarantor will be responsible for the non-payment. 

When will we need guarantees?

Now that you know what a guarantee consists of according to the official definitions provided by the entities mentioned in the previous section, it is convenient to go into detail about another of the key points to understand how the guarantee works: when it is needed. There are different types of guarantees depending on the need you have. 

Later we will explain each type of guarantee in detail, but it is advisable to keep in mind at all times that there are several categories of them to read this section on when guarantees are needed. The financial institution asks clients for a guarantee when signing a credit or loan contract. It can be a personal or business loan for a legal entity.

On the other hand, the most common way to request a guarantee is when contacting a mortgage financial institution. In addition, on many occasions, the bank becomes the guarantor of a third party. 

So that it is in charge of both requesting it and, if there is no guarantor, raises the option of automatically becoming the guarantor of said credit or loan. In this context, two types of guarantees are considered. On the one hand, a commercial guarantee in which banks or other credit institutions act as beneficiaries. 

On the other, there are guarantees as a mere financial product that is offered to customers. In the first case, it is usual for credit institutions to request guarantees from clients for loans or credits that reach very high amounts of money. The reason for doing so is that, when talking about large amounts, the debtor has sufficient solvency to face the loan. In this sense, there must be a guarantor who, generally, tends to be a person close to the debtor who, in the event of nonpayment, subrogates himself in his place and deals with the non-payment. 

The guarantor, for his part, will always have to be a solvent person with the sufficient patrimonial capacity to face said payment. He must be of legal age, demonstrate that he has no outstanding debt, and, in addition, he must be designated as guarantor in the loan contract and sign the same as guarantor. In the case of non-payment, the guarantor is responsible for said nonpayment with his present and future assets until he finishes paying off the debt for which he is the guarantor.

On the other hand, moving towards the second type of guarantee we have mentioned (as a mere financial product offered to customers) means that the financial institution becomes a guarantor. 

Types and classifications of guarantees

There are different ways of classifying guarantees, depending on various variables. First, we distinguish between the endorsement itself and the endorsement as a product: 

Endorsement itself: This guarantee is what financial institutions require when they grant a loan. This is the guarantee responsible for responding to the entity for the obligations acquired by the beneficiary of the loan. 

The endorsement as a product: Banks and financial institutions offer this guarantee. In this case, the bank does not grant a loan, but in exchange for an amount of money (a commission), a guarantee is received from contracting a loan from a third party. Guarantees can also be distinguished depending on the issuer.

Personal guarantee: This is issued by a natural or legal person who undertakes to pay the debt in case of default by the borrower or principal debtor. It works as an additional guarantee to the debtor’s assets. This type of guarantee is expected in the granting of consumer loans and company financing, and they are free guarantees; that is, the guarantor does not receive any amount from the guarantee for granting the guarantee. 

Bank guarantee: In this case, a financial entity guarantees and undertakes to pay a debt. 

Economic guarantee: In this type of guarantee, the financial entity is responsible for a deferred payment (rent, purchase, payments to the Treasury, etc.). These guarantees guarantee that something will be paid for in the future. The economic guarantee can, in turn, be commercial if the bank responds to non-compliance by the client in commercial transactions; or also financial when the bank responds in loans, credits, bills of exchange, or promissory notes. 

Technical endorsement: Here, the financial entity responds financially for the breach of obligations of a non-economic nature. Technical guarantees are those in which it is guaranteed that we will carry out a work or service as requested. This type of guarantee is requested in public tenders, works, supply contracts, etc. In most of these cases, a pre-guarantee is required to be able to participate in a public tender. Documentary credits: These are international guarantees. They are usually requested in import and export operations. The financial entity is responsible for payment, provided that the conditions required by the exporter are met. The usual thing in these operations is that the bank of the country of the importer is the one that intervenes.

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