A personal guarantee is a written promise by an owner or officer to stand behind a company's obligations with personal assets. If the business does not pay or perform, the financier can pursue the guarantor directly.
How it works in factoring
Factoring agreements often ask the principal owners to sign a guarantee. The scope varies significantly:
- Full or unlimited guarantee: covers all obligations the business owes the factor, including repurchase of unpaid invoices under recourse terms, fees and legal costs.
- Validity or performance guarantee: narrower; covers losses caused by the business's misconduct, such as false invoices, diverted payments or breached warranties, but not ordinary customer nonpayment.
- Limited guarantee: capped at a dollar amount or period.
Even in non-recourse factoring, where the factor absorbs approved credit losses, a validity guarantee is common. It reflects the factor's main concern: fraud and misrepresentation rather than credit risk.
A guarantee usually continues until the business's obligations are fully satisfied, and sometimes until the guarantor gives written notice ending it for future transactions.
What to check
- Exactly which obligations the guarantee covers
- Whether it is capped in amount or time
- Whether it continues after you leave the company or sell your shares
- How it ends when the factoring relationship is paid off
A guarantee can expose your home and savings. It is reasonable to ask whether a narrower validity guarantee is acceptable, and to have counsel examine the document before signing.