What does it mean to guarantee a subsidiary?

Subsidiary guarantee means that the parent company provides guarantee for the borrower's loan, so that its subsidiary company can obtain the corresponding credit line. Because the parent company's financial system is better and its credibility is higher, the subsidiary guarantee will bring higher confidence to the borrower. This kind of guarantee is a relatively safe financing method, and the applicant has less risk, but the parent company also needs to bear certain risks.

Subsidiary guarantee can take many forms, the most common is to provide a letter of guarantee or a letter of commitment to the bank, so that the bank can believe that the parent company has enough strength to bear the debts of the subsidiary. Another way is to provide the assets of the parent company as collateral to the bank to ensure the repayment ability of the subsidiary. In addition, the parent company can also sign a guarantee agreement with the subsidiary, promising to repay it on its behalf if the subsidiary is unable to repay it.

Although the subsidiary guarantee reduces the risk of the applicant, it increases the financial risk of the parent company. If the subsidiary can't repay the loan, the parent company will bear certain economic losses, and even affect the operation of the whole company. Therefore, before the parent company decides to provide guarantee for its subsidiaries, it must fully evaluate the debt capacity of the subsidiaries, strictly control its own financial risks, and avoid unbearable losses caused by the guarantee behavior.