In the world of corporate construction lending, guarantees are a fundamental part of the risk management process. Whether you’re borrowing through an LLC or a corporation, lenders almost always require some form of business entity guarantee to secure the deal. But not all guarantees are created equal.
This article explains the mechanics of corporate and business entity guarantees, when they are required, who typically signs them, and how they influence loan terms for experienced developers in the $750K–$5M range.
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What is a corporate guarantee in construction lending?
A corporate guarantee is a legally binding promise made by a company or business entity to assume responsibility for a debt if the primary borrower (often a subsidiary or special-purpose entity) defaults.
In construction lending, this often applies when:
- The borrower is a newly formed LLC or single-purpose entity (SPE)
- The parent company or another affiliated entity is stronger financially
- The lender requires additional assurance beyond the project itself
Corporate guarantees are designed to give lenders recourse to another source of repayment in the event the primary borrower fails to perform.
Why do lenders require business entity guarantees?
Construction lending is inherently risky, especially for ground-up or multi-phase projects. Business entity guarantees help lenders mitigate risk in several ways:
- Credit backstop: If the borrowing entity lacks operating history, a guarantee provides confidence
- Project completion: Guarantees may include “completion provisions” that ensure the project is finished, regardless of delays or budget overruns
- Performance signal: A willingness to guarantee demonstrates borrower commitment and financial strength
Lenders like Marquee focus exclusively on business entity borrowers with at least three completed projects. Even for experienced developers, guarantees remain standard, especially when loans approach or exceed $1 million.
What types of guarantees are used in corporate construction lending?
There are several types of guarantees, each serving a different purpose:
- Full-recourse guarantee: The guarantor is personally or corporately liable for the entire loan balance, including interest and fees
- Limited guarantee: Liability is capped at a specific amount or based on certain conditions (e.g., a percentage of the loan)
- Completion guarantee: Ensures the developer will finish the project, even if costs exceed original estimates
- Carve-out guarantee: Also known as a “bad boy” guarantee, this covers lender losses caused by fraud, gross negligence, or misuse of funds
- Joint and several guarantees: Multiple guarantors are each fully liable for the debt, allowing the lender to pursue any party for full repayment
The structure depends on the loan size, project risk, entity type, and experience level of the developer.
How do guarantees differ for LLCs vs corporations?
While both LLCs and corporations can act as guarantors, their internal governance and liability structures vary:
- LLCs: Guarantees are typically signed by the managing member(s), with authority granted through the operating agreement or corporate resolution
- Corporations: A board resolution is usually required, and officers signing must have documented authority to bind the company
In either case, the guarantee must be authorized, documented, and enforceable. Lenders require a paper trail that confirms the entity has formally agreed to assume the liability.
When are full-recourse vs non-recourse guarantees required?
Most construction loans, especially in the private lending space, are structured with full or limited recourse. Pure non-recourse loans are rare and typically reserved for:
- Very low loan-to-cost (LTC) or loan-to-value (LTV) ratios
- Institutional borrowers with long track records
- Stabilized or income-producing properties (not ground-up)
For development loans, especially those in the $750K–$5M range, full or partial guarantees are standard. Marquee may offer flexible structures based on borrower experience, equity contribution, and project location, but zero-guarantee loans are the exception, not the norm.
What risks do guarantees cover in a construction loan?
Guarantees protect the lender against a range of risks, including:
- Payment default: Failure to make interest or principal payments
- Project abandonment: Halting construction due to cost overruns or disputes
- Unauthorized fund use: Draws used for non-project-related expenses
- Environmental or legal issues: Contamination, zoning violations, etc.
- Fraud or misrepresentation: Material misstatements during the application or draw process
Carve-out guarantees specifically cover these “bad acts,” even in a non-recourse or limited-recourse loan structure.
Who typically signs a corporate or business entity guarantee?
The signing party depends on the type of entity:
- For LLCs: The managing member, or all members if ownership is equal and authority is shared
- For corporations: An officer such as the CEO, CFO, or President, with board-approved authority
- For holding companies: The parent entity often guarantees the loan on behalf of its subsidiaries or SPEs
In joint venture arrangements, multiple parties may be required to sign, particularly if each controls a portion of the development or funding.
Lenders will request:
- Executed guarantee agreement
- Corporate resolution or consent to guarantee
- Supporting financials from the guarantor
The more experienced and well-capitalized the guarantor, the more favorable the loan terms.
How do guarantee structures affect loan approval and terms?
Guarantee structures directly influence:
- Loan approval: A strong guarantor can help an entity with limited credit history get approved
- Interest rate: Lower perceived risk may reduce rates or fees
- Leverage: Higher loan-to-cost ratios are more likely when strong guarantees are in place
- Speed to close: Clean documentation and authorized guarantors accelerate underwriting
- Negotiability: Guarantors with leverage can often negotiate limited exposure or phase-out clauses tied to milestones
Developers who want favorable terms should approach guarantees as a strategic lever, not just a closing condition.
How can developers negotiate guarantee terms with lenders?
Not all guarantees are set in stone. Experienced borrowers can often negotiate based on:
- Track record: 3+ successfully completed projects signal lower risk
- Equity contribution: The more skin in the game, the more leverage you have
- Exit certainty: Pre-sale contracts or clear refinance plans reduce exposure
- Phased releases: Request reduced guarantee liability as construction milestones are completed
- Financial strength: High liquidity or cash flow allows for better terms
Working with lenders like Marquee that specialize in business entity lending for experienced developers makes these conversations possible.
Unlike institutional banks or generic private lenders, Marquee understands how to align guarantee structures with borrower sophistication.
Want a clear path to funding, with smart, flexible guarantee structures?
Apply with Marquee Funding Group today and structure your next loan on your terms.