While the invoice factoring approval process is far more streamlined than the processes of conventional financing options, there are still significant documents that you will have to submit for approval. Understanding the role of personal guarantees versus validity guarantees is key to understanding your factoring paperwork.
A guarantee is simply a promise to the factoring company that they will be able to recover the funds they advance your business in the event that your customer defaults on an invoice.
Personal Guarantee vs. Validity Guarantee
A personal guarantee, also used by traditional lenders, grants your factor the right to claim personal assets not tied to the business in an attempt to collect on defaulted debt. Many personal guarantees allow the factor to pursue your assets before pursuing collections action against your customers if they can control or sell your assets with less effort.
This type of full guarantee may seem extreme, and in the majority of factoring relationships that require a personal guarantee, they are. If you sign a personal guarantee you open yourself up to potential financial disaster if your customers fail to fulfill their obligations.
Only the factor can release you from a personal guarantee.
When you are considering an invoice factoring relationship, think carefully about whether you’re willing to assume the risk of tying your own assets to your business. If so, and as always, read any personal guarantee carefully before signing or notarizing so you are fully aware of your responsibilities under the guarantee.
Many invoice factoring companies use the less-extreme validity guarantee over a full guarantee. A validity guarantee makes certain promises regarding the state of your accounts receivable, such as:
- Invoices are valid for products delivered or work completed
- They are not pledged to another creditor
- Invoices are collectible
Under a validity guarantee, you promise that you will forward any misdirected payments to the factoring company. For example, if a payment sent to you instead of the factor, often referred to as “over notice.”
In addition, validity guarantees typically include a provision granting the factor rights to all money owed in the event that your company files for bankruptcy or restructuring.
In exchange, the factor generally agrees to provide any needed invoice documentation to customers to facilitate their payment, and to fulfill any other requirements necessary to continue receiving payments, such as enrolling with a state agency as a payee.
A validity guarantee is preferable to a personal guarantee primarily because the factor assumes the majority of the risk associated with the invoices they have purchased. Your company is protected in most instances if your customers default on their accounts. At the same time, it is still a legal document that you should read and understand fully before signing.
If you are hesitant to execute a personal guarantee to finalize a factoring relationship, contact Factor Finders today. We work with invoice factoring companies around the country that prefer the validity guarantee to a full guarantee, giving you greater peace of mind as you pursue a factoring relationship. Learn more here, or contact Factor Finders to get a competitive factoring quote and start the application process today!