As a subsect of loan financing, Mutual Guaranty Loans are subject to a procedure of issuance very similar to that for regular loans issued by commercial banks, including application, review and approval. The major difference for Mutual Guaranty Loans lies in the pre-application process. Before applying for a Mutual Guaranty Loan from banks, the applying firms must form a Mutual Guaranty group and then complete the application for the loan as a group. More specifically, the entire procedure is as such:
- Three or more companies come together to form a Mutual Guaranty group. Each firm within the group has to negotiate with the others in order to determine the quota of the respective loan amount that each firm needs. Then, the group will submit their collective loan application to a commercial bank.
There is no unique or singular way to form a group—it can be formed by themembers of certain credit union, formed freely, independent of any existing organizations, or it can be formed with the guidance of government, industrial organizations, or even banks. - The formed group will submit the loan application to the bank, either at the counter or online.
- The bank will conduct due diligence reviews for each individual member of the group, and determine if the requested loan will be granted.
- If the application is approved, all the members of the group need sign the legal documents with the commercial bank, and agree to jointly bear the responsibility of repayment of the loans.
- All members of the group need to set up an account in the bank in order to deposit the required guaranty reserve.
- The bank will issue the loans.
For example, five manufacturing SMEs would like to apply for a loan, and all the firms have stable customers and incoming cash flow. When the market is booming, the firms may experience an increased need to finance their working capital.
However, due to inadequate collateral, none of these 5 firms can obtain the loan from bank individually. In this case, these 5 firms can form a Mutual Guaranty group with a pre-determined quota and a guaranty agreement, and then apply for the loan from a bank.
If the loan, say, RMB 25 million, is approved after due diligence, and the quota was predetermined to be equally split, then the loan will be divided by 5, and each member will receive 5 million. Each member will also need to pay 20 % of guaranty reserve, with similar shares of borrowed funds.
Mutually Guaranty Loans
Loan, Microloan
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