A guarantor is a person or business entity that makes a financial promise, sometimes backed with collateral, for another person or business entity that is requesting either a loan, credit or some form of financial responsibility for which he or it is unable to qualify on their own. In the event that the primary person or entity requesting the loan or credit defaults, the guarantor is liable for any unpaid or overdue balances.

Guarantors are most common in the real estate industry where first time home buyers don’t have the credit history necessary to secure mortgages. In this instance, parents or friends of the buyers can step in and guarantee or co-sign the mortgage without securing a stake in the property.

When attempting to obtain a new merchant account, many smaller or medium sized businesses are asked to provide a personal guarantor. The function of the personal guarantor in this case is in the event that the business entity should fail to meet any of its financial requirements to the credit card processing bank, then the bank can legally pursue the individual for recourse. Simply stated, if the business owes the processor money and cannot pay, the individual guarantor is now legally liable for those funds.

The reason personal guarantors are requested for new businesses seeking merchant accounts is that if the entity commits fraud or simply mismanages their operation, the processing bank can be held liable by the cardholders for large sums of money. A financially solid, legally bound guarantor minimizes their risk.

There are legitimate reasons why a business of any type or size would rather not provide a personal guarantor. To begin with most businesses are set up to separate personal assets from business assets protecting personal ones in the event of a business failure. Becoming a personal guarantor of your business removes this protection. In the event that the merchant does not wish to provide a personal guarantor there are ways that he can still acquire his account without one.

If your business is in a strong financial position there might not even be a request for a personal guarantor for the merchant account. But if you can provide a corporate resolution containing a balance sheet that proves the business has been in operation for at least one year and has assets, cash flow, receivables and inventory to cover its debts, the request for a guarantor might be waived.

Another method of obtaining your merchant account without a guarantor and without a loan is to ask your bank for a letter of credit. This means that in the event your business defaults on a financial obligation that does not exceed the amount of credit stated in the letter, the processing company can get the funds from the issuer of the letter of credit. At that time, the letter of credit would instantly be converted into a loan to the business. But in the even that there is no default, the letter would simply expire at the end of the agreed upon term.

A more practical method of obtaining a merchant account without a personal guarantor would be to allow the processing bank to hold back a portion of the funds from your transactions in an account that they would have access to in the event of any default. New business entities might have difficulty allowing some of their vital cash flow to be held by the processing bank, but functioning without a merchant account is probably more costly. Over time, the reserves would be released to the entity on some sort of agreed upon timetable and rate.