RECIPROCAL GUARANTEE SOCIETY (GRS)

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An MGS (Mutual Guarantee Society) is a financial institution specialised in granting guarantees for loans and credits to companies and entrepreneurs. This is a figure created to facilitate access to financing for those companies that, due to their size or economic situation, find it more difficult to obtain bank loans and credit. MGSs operate through the reciprocal guarantee system, which means that the companies that benefit from their services undertake to guarantee other associated companies in the future, thus generating a network of guarantees that allows financial institutions to grant credit more easily.

The functions of MGSs include issuing guarantees and sureties for loans and credits, managing guarantee funds, promoting and advising companies and entrepreneurs, and collaborating with public and private institutions in programmes to help entrepreneurship and economic development. In Spain, There are several MGSs authorised by the Bank of Spain operating in different autonomous communities, such as Avalmadrid, Avalcanarias, Avalunión, Garántia and Iberaval, among others.

SGR for entrepreneurs

Mutual Guarantee Societies (MGS) can be a good financing option for entrepreneurs who need to obtain a loan for their business. MGSs are financial institutions that provide guarantees for loans that small and medium-sized enterprises (SMEs) apply for from banks and other financial institutions. One of the main advantages of MGS for entrepreneurs is that it allows them to access financing that they might not otherwise be able to obtain due to lack of collateral. In addition, MGSs often offer better financial conditions than SMEs can obtain directly, since by offering a guarantee, they reduce the risk for banks. Another advantage of MGSs is that, as they specialise in guarantees, they have a deeper knowledge of the financial market and can advise entrepreneurs on the best way to finance their business. In a nutshell, MGS can be a good financing option for entrepreneurs who need to obtain a loan for their business and do not have sufficient collateral. They offer better financial conditions and specialised advice to help entrepreneurs obtain the financing they need.

To internationalise

Mutual Guarantee Societies (MGS) can be of great help to companies that want to internationalise, as they facilitate access to financing under favourable conditions in order to carry out their expansion process abroad.

Some of the ways in which MGS can assist companies in their internationalisation are:

1. Guarantees for obtaining loans and credit lines: MGSs can act as guarantors for companies vis-à-vis banks and other financial institutions, enabling them to access loans and credit lines on more favourable terms.
2. Support in obtaining public funding: MGSs can help companies to access public financing programmes for internationalisation, such as ICO loans or European funds.
3. Advice and support in the search for funding: MGSs can provide advice and support in the search for financing for internationalisation, both through their own services and through their network of contacts with banks and other financial institutions.

In a nutshell, MGSs can be a very useful tool for companies that want to internationalise by offering them guarantees to obtain financing on favourable terms and support in the search for public and private financing.

Advantages of GMS as a source of financing

Mutual guarantee companies (MGSs) have several advantages as a source of financing for companies, among them:

1. Access to finance: MGSs enable companies to access finance that might otherwise be difficult to obtain. MGSs facilitate access to bank loans and credit by guaranteeing a portion of the financing, which reduces the risk for banks and increases the likelihood that the financing request will be approved.
2. Reduction of guarantees: MGSs reduce the collateral that companies have to present to banks to obtain financing, which can be particularly useful for companies that do not have many assets to put up as collateral.
3. Improved solvency: MGSs can improve the creditworthiness of companies, enabling them to obtain financing on better terms. By guaranteeing part of the financing, MGSs reduce the risk for banks, which can translate into a lower interest rate for the company.
4. Financial advice: MGSs can also provide financial advice and help companies to draw up business plans and obtain financing.
5. Promotion of entrepreneurship: MGSs can encourage entrepreneurship and the development of new businesses, as they can provide access to finance and advice to start-ups.

It is important to Note that MGSs also have some limitations, such as the fact that their guarantee capacity is limited, so they cannot guarantee all the financing requests they receive. They may also have eligibility requirements and restrictions on the type of companies they can guarantee.

Practical examples of MGS financing

Here are some practical examples of MGS financing:

1. A start-up company applies for a loan from its bank to finance the purchase of machinery and equipment for its business. However, the bank requires additional collateral to approve the loan. The company does not have the resources to provide such collateral, so it approaches an MGS. The MGS guarantees the loan and the company receives the financing it needs to grow its business.
2. A small business wants to expand and open a new branch in another city, but does not have sufficient capital to do so. The bank offers a loan, but the cost of financing is very high due to the lack of sufficient collateral. The company approaches an MGS, which agrees to guarantee the loan, thus reducing the cost of financing and allowing the company to expand.
3. A company involved in exporting products needs financing to purchase materials and cover production costs for a large order from a customer abroad. The bank is willing to provide a loan, but requires additional collateral. The company approaches an MGS, which guarantees the loan, enabling the company to fulfil its order and increase its exports.

In short, MGSs are an important source of finance for small and medium-sized enterprises that need additional collateral to obtain loans from banks. MGS can underwrite loans for investment, expansion, export and other business projects, reducing risk for banks and increasing access to finance for businesses.

Case study of an entrepreneur using MGS to finance his project

Maria is an entrepreneur who wants to start her own gourmet products company. However, does not have sufficient financial resources to make its project a reality. Despite having sought financing from banks and other financial institutions, he has encountered many obstacles because his business is new and has no credit history. A friend recommends that she find out about Mutual Guarantee Societies (MGS). After some research, Maria discovers that these companies can be an excellent option for financing her project. An MGS is a financial institution that guarantees companies and offers them financing through a bank or financial institution, allowing the entrepreneur to obtain a loan on more favourable terms.

Maria decides to go to an MGS to apply for financing. The MGS evaluates her project and, considering it viable, decides to guarantee her loan. In this way, Maria can obtain a loan through a bank, but with the guarantee of the MGS. The MGS guarantee allows the bank to reduce the credit risk and, therefore, to offer a loan on more favourable terms for Maria. Thanks to the SGR, María obtained the financing she needed to make her gourmet products business project a reality. She also obtained the backing of a financial institution that has confidence in her project and in her ability to carry it out.

In a nutshell, Maria used MGSs as a source of finance to obtain the collateral she needed to get a bank loan and make her business project a reality.

Mutual Guarantee Societies were created and regulated in Spain in 1978, with the aim of facilitating access to credit for SMEs and the self-employed. This task is carried out in two ways:

• By means of the guarantor figure of transactions with banks, savings banks and administrations.
• They are able to to obtain better financial conditions thanks to the agreements they usually sign with certain financial institutions.

What benefits does a company gain from using an MGS?

You can sign a credit operation with a bank more easily, as the MGS guarantees the operation. This makes the financial entity feel more comfortable as it reduces the risk, since in the event of non-payment it has the MGS as guarantor.

A study published in the first half of this year by CESGAR, the Spanish Association of Guarantee Societies (SGR), indicates that only 70.8% of SMEs that consider obtaining financing from credit institutions do so.. 14.8% do not take the step of making an enquiry, either because they expect to receive a refusal, or because they are repulsed by the banks. Moreover, not all those who receive the loan do so in the desired amount.

There are 19 general and sectoral MGSs in Spain. All of them offer two types of guarantees: financial guarantees, which allow them to negotiate better conditions for their current and investment loans, credit facilities, leasing and factoringThe technical ones, which serve to guarantee non-monetary commitments to the Administration or third parties, when obtaining advances on subsidies, definitive and professional bonds, international tenders and guarantees in the gambling sector, for example.

Who forms MGSs?

MGSs are made up of participating members, i.e. SMEs and the self-employed who are at the same time the beneficiaries of the guarantee, and protective members: public administrations, chambers of commerce and associations and credit institutions, which provide resources and improve their solvency. They also have, as a guarantor of their reliability, the supervision and inspection of the Bank of Spain, and the support of institutions such as the state trading company Cersa, or the Ministry of Economy, Industry and Competitiveness itself.