Definition of accommodation approval


What is a lodging endorsement?

A hosting endorsement is an agreement for one business to support the credit liability of another. Generally, this type of arrangement adds strength to the creditworthiness of the financially weaker of the two entities. For example, a parent company often provides hosting backups to a subsidiary. This allows the subsidiary to enjoy the credit rating of the parent company, in some cases, and often more favorable loan terms.

Key takeaways

  • An accommodation endorsement is an agreement whereby one business endorses the credit liability of another business.
  • Accommodation endorsements are generally provided to add strength to the creditworthiness of the financially weaker entity, allowing you to enjoy the stronger credit rating of the entity.
  • Small businesses generally benefit from hosting endorsements, primarily in their ability to receive financing, due to the strength of the endorser’s strong financial position.
  • A hosting endorser is often the parent company of a subsidiary, but does not necessarily have to be directly related to the company it supports.
  • Accommodation sponsors should always be aware of the financial amount they are endorsing as they may be on the hook for all financial responsibility.

Understanding a Hosting Approval

A hosting endorsement is the corporate equivalent of a joint signature loan agreement. Let’s say a 19-year-old college student with only a part-time job and no credit history needs a used car to use during a summer internship. This student’s parent may be required to co-sign the auto loan, indicating that they are responsible for the debt if the student defaults.

Similarly, an accommodation endorsement occurs when a subsidiary company requests a loan, but it is not entirely foolproof that this entity can pay, because its balance sheet is below average. In this case, the parent company issues an accommodation document. This provides a promise to the bank that the parent company, with many more assets, will pick up the loan if the original borrower defaults.

Hosting endorsements are exceptionally useful for small businesses. However, for large parent companies, hosting promotions don’t always work. The bank, or the note holder, if the loan is resold, can go after the parent company if they are not paid. This is significant if the smaller entity borrowed substantially.

From a practical perspective, all a willing sponsor should do is sign on the dotted line, indicating that this group is the financial backer for the smallest organization or subsidiary. Similar to the way the US government fully endorses US Treasuries, the reputation of the parent company is now at stake for the loan.

Special Considerations

Please note that a hosting endorser is not always a parent company. However, he almost always has a close relationship with the borrower. Therefore, a larger company may be willing to support one of its critical suppliers. A large soft drink company might want to be the hosting sponsor for one of its bottlers, for example.

Accommodation endorsements also occur among the keiretsu structure of companies in Japan, where a group of companies take equity stakes from each other and sometimes collaborate and share projects. Again, it is the strongest of these companies that provides the hosting support to the others.

Another example is a national bank that supports acceptances from one of its regional subsidiaries. If the regional branch has deposit problems, the national bank parent can step in to provide the necessary funds.

In a partnership, if one of the partners makes approvals for non-business accommodations, the business or the remaining partners are not liable.

The hosting endorser should always be aware of the support they are providing to ensure that they will be able to cover any liability should the business they support fail to meet its financial obligations. For example, if a subsidiary takes out a $ 100 million loan and withdraws the full amount, but is unable to repay anything, the accommodation endorser will be on the hook for the entire $ 100 million.

If the endorser is not in the financial position to repay that amount at the given time, as they may have had a bad fiscal quarter or year, or are paying off their own debt, this could negatively affect their financial condition and credit rating.

www.investopedia.com

READ ALSO:  Section 1202 Definition
About the author

Mark Holland

Leave a comment: