Q: With the focus on liquid assets as the most ready indicator of a guarantor’s strength in a time of borrower crisis instead of personal cash flow, isn't it a problem in that liquid assets are non-recurring in terms of covering debt service?

A: Liquid assets represent cash amounts that can be verified at any point in time and considered when evaluating the strength of the guarantor or a related party. They are indeed tangible, easily measured, and replenishing those assets when they’ve been consumed can be monitored readily by way of periodic statements. Liquid assets are perhaps the most dynamic line items on the balance sheet and are constantly being depleted or expanded, so their recurrence seems not to be an issue.  

By contrast, there is no assurance that personal cash flow can be repeated. The real issue in considering the merits of a guarantor is the destination of any surplus that might flow to that person or entity. Responsible guarantors recognize the importance of maintaining and quickly replenishing liquid assets available to service debt and demonstrate an important characteristic we all want to see in a guarantor.

In addition, if a guarantor’s liquid asset were depleted and remain so, it likely implies that the guarantor’s personal cash flow was insufficient to replenish the liquid asset balances. Yet regardless of the reason for insufficient liquid assets, those assets are the only ready cash available to support a company’s debt service in a crisis.