An accommodation party is a party attaching its name to a piece of commercial paper in order to lend credence to another party, such that the non-credible party will be validated in terms of that commercial paper. Commercial paper means any kind of written checks, drafts, or promissory notes.
Many promissory notes are issued in the act of purchasing an object of great value. Because the amount of money required to purchase that object may not be immediately available, a purchaser may sign a promissory note to the seller promising to eventually pay back the full price of the object with interest. But in some instances, the seller will take note of the buyer’s credit status and will decide that the buyer cannot be relied upon to actually pay the full promissory note and interest.
Instead of simply being rejected, however, the buyer could add the signature of a credible accommodation party to the promissory note, thereby giving the seller additional reason to trust in the promissory note and its eventual payment.
An accommodation party does not gain any monetary benefit by affixing his or her signature to a promissory note or other form of negotiable instrument. This means that most likely the accommodation party is providing his or her signature only as a favor to the accommodated party, especially as adding the accommodation party’s signature to the negotiable instrument gives secondarily liability to that party.
Accommodation parties are either considered accommodation endorsers or accommodation makers, depending on exactly when they add their signatures to the negotiable instrument. If the accommodation party adds its signature at the creation of the promissory note or negotiable instrument, then the accommodation party is considered an accommodation maker.
If, instead, the accommodation party adds its signature to the negotiable instrument after it has been created, then the accommodation party will be considered an accommodation endorser, as the accommodation party is essentially endorsing the negotiable instrument.