A financial guarantee is an agreement that guarantees a debt will be repaid to a lender by another party if the borrower defaults. Essentially, a third party acting as a guarantor promises to assume responsibility for a debt should the borrower be unable to keep up on its payments to the creditor.
Guarantees can also come in the form of a security deposit or collateral. Financial guarantees act like insurance policies, guaranteeing a form of debt will be paid if the borrower defaults. Guarantees can be financial contracts, where a guarantor agrees to assume financial responsibility if the debtor defaults. Financial guarantees can result in a higher credit rating for the lender and better interest rates for the borrower (GTAI, 2022).
Having a guarantee from a third party such as EIB increases the creditworthiness of the project and reduces the financial risk of the capital that is being guaranteed. This in turn increases trust from additional borrowers in the project and, thereby, may lead to access to additional capital.
Disadvantages of a guarantee usually include a diligent assessment of the financial health of the borrowing entity, as well as additional fees that may need to be paid to secure guarantees.
Allen, F., Carletti, E., Goldstein, I., Leonello, A. (2017). "Working Paper Series: Government guarantees and financial stability". ECB Working Paper 2032. https://www.ecb.europa.eu/pub/pdf/scpwps/ecbwp2032.en.pdf