What Is an Accommodation Endorser?
An accommodation endorser is a business that backs the credit liability of another. Generally, the endorser adds strength to the creditworthiness of the financially weaker of the two entities. For example, a parent company often provides accommodation endorsements to a subsidiary. This lets the subsidiary enjoy the parent company's credit rating, in some instances, and often, more favorable loan terms. When one company acts as an accommodation endorser, they put their reputation on the line for another company.
- An accommodation endorser is a business that backs the credit liability of another business.
- Parent companies often act as accommodation endorsers for their subsidiaries.
- An accommodation endorser is a corporate entity rather than an individual.
- A co-signer on a loan for an individual is the personal equivalent of an accommodation endorser.
- When an accommodation endorser or a co-signer lends their endorsement, the borrower benefits from the endorser's credit rating.
Understanding Accommodation Endorser
An accommodation endorser is the corporate equivalent of a loan co-signer for an individual. Let's say a 19-year-old college student with only a part-time job, and no credit history needs a used car for use during a summer internship. This student's parent may need to co-sign the auto loan, indicating that they are responsible for the debt if the student defaults.
Similarly, say a subsidiary company applies for a loan, but it's not entirely foolproof that this entity can pay due to its below-par balance sheet. In this case, the parent company becomes the accommodation endorser. This provides a promise to the bank that the parent company, with far more assets, will pick up the loan if the original borrower defaults.
Accommodation endorsers are exceptionally helpful to small companies. For the large parent companies, however, the endorsements don't always work out. The bank, or holder of the banknote if the loan is resold, can then go after the parent company if they are not getting paid. This is meaningful if the smaller entity borrowed substantially.
From a practical perspective, all an accommodating endorser must do is sign on the dotted line, indicating that this group is the financial backstop for the smaller organization or subsidiary.
Similar to the way U.S. Treasuries are fully backed by the U.S. government when a parent company acts as an accommodation endorser, its reputation is now on the line for the loan.
Note that an accommodation endorser isn't always a parent company. However, it almost always has a close relationship with the borrower. Therefore, a larger company may provide an accommodating endorsement for one of its critical suppliers. A large soda company might want to be the accommodation endorser for one of its bottlers, for example.
Accommodation endorsement also happens among the keiretsu structure of companies in Japan, where a group of enterprises take equity stakes in one another and sometimes collaborate and share projects. Again, it's the strongest of these companies providing the accommodation endorsement for the others.