Legal Definitions - accommodation paper

Accommodation paper refers to a financial document, such as a promissory note or a bill of exchange, that is signed by a person (the "accommodating party") to help another person or entity (the "accommodated party") obtain credit or a loan. The accommodating party signs the document without receiving any direct financial benefit or payment for doing so. Their role is to act as a guarantor, lending their creditworthiness to the accommodated party, who remains primarily responsible for the debt.

Essentially, the accommodating party agrees to be responsible for the debt if the primary borrower fails to pay. This arrangement is typically used when the accommodated party has insufficient credit or financial standing to secure the credit on their own, and the accommodating party has a stronger financial history.

• Example 1: Startup Business Loan

  Scenario: A young entrepreneur, Maya, wants to start a small artisanal bakery. She needs a loan to purchase ovens and equipment, but her new business has no credit history, and she personally has a limited credit score. Her aunt, who has excellent credit and a stable income, agrees to co-sign the promissory note for the business loan from the bank.

  Explanation: Here, the promissory note is the accommodation paper. Maya's aunt is the accommodating party; she co-signs the note without receiving any direct financial benefit from the bakery loan itself. Her signature provides the necessary credit assurance to the bank. Maya's business is the accommodated party and remains primarily responsible for repaying the loan. If the bakery defaults, the aunt becomes liable for the debt.

• Example 2: Personal Loan for a Young Professional

  Scenario: Sarah, a recent college graduate, needs a personal loan to consolidate some high-interest credit card debt. She has a new job but a limited credit history, making it difficult to qualify for a favorable interest rate on her own. Her older sister, who has an excellent credit score and a long financial history, agrees to co-sign the promissory note for the personal loan from a credit union.

  Explanation: The promissory note for the personal loan is the accommodation paper. Sarah's sister is the accommodating party; she signs the note without receiving any direct financial benefit from the loan itself. Her signature provides the necessary credit assurance to the credit union. Sarah is the accommodated party and remains primarily responsible for repaying the loan. If Sarah defaults, her sister becomes liable for the debt.

• Example 3: Small Farm Equipment Purchase

  Scenario: A small organic farm, "Green Acres," needs to purchase a new tractor. The farm has been operating for a few years but hasn't built up a strong enough credit profile to qualify for a large equipment loan on its own. The farm's founder and primary investor, Mr. Henderson, who has substantial personal assets and an excellent credit score, co-signs the financing agreement (which includes a promissory note) with the equipment supplier.

  Explanation: The financing agreement, specifically the promissory note within it, serves as accommodation paper. Mr. Henderson is the accommodating party; he co-signs the agreement to enable Green Acres to acquire the tractor, but he doesn't personally use the tractor or receive direct payment for co-signing. Green Acres is the accommodated party and is primarily obligated to make the payments. Mr. Henderson's co-signature acts as a guarantee, making him responsible if the farm fails to meet its financial commitments.