Guarantees enable financial institutions to invest in circular businesses or initiatives with a higher default risk, i.e. the risk that the borrower is not able to repay the debt by the end of the loan duration. Two main types of guarantees exist that can mitigate this higher default risk: collateral guarantees and loan guarantees.
Collateral guarantees provide a claim to the company’s assets or the private assets of an entrepreneur in case of default or bankruptcy. A bank would be able to take over (part of) the assets and sell these assets in order to retrieve the principal loan or interest payments either partly or fully.
What are guarantees in general?
Loan guarantees are commitments in which a third party takes over (part of) the debt obligations in the case the borrower defaults (i.e. fails to repay the debt). Thereby, guarantees enable financial institutions to invest in businesses or initiatives showing higher default risk, such as highly innovative Circular City initiatives.
For start-up companies, collateral guarantees are often difficult to provide since they do not have many assets yet. Therefore, third parties can provide loan guarantees that assure the payment of debt service in case the company’s cash flow is insufficient.
Both public (governmental) and private organisations can offer loan guarantees for your circular economy initiatives.