This article will focus on how personal guaranties work for companies financing with asset based lenders or factoring companies.
At Fast A/R Funding we have several staffing agencies factoring with us so we will use an owner of a staffing company and her business in our references.
One of the first questions we always get from our clients is why do you need a personal guaranty from me if you are taking my invoices as collateral for the advances.
The simplest answer is that unlike financing a large company, the finances of a small business and the finances of a small business owner are usually intertwined. There are usually no minority shareholders, no institutional equity and no complicated balances sheets with liabilities that are quasi equity. A small business owner is typically the only decision maker when it comes to the finances of her business.
Because the small business owners finances are so intertwined with her staffing company one of the things that is important is that as a lender we receive the benefit of the owners personal balance sheet in extending financial accommodations.
This might be a good time for one simple example of how the owner of a staffing companies personal financials are intertwined with her company and how Fast A/R Funding may make a decision to extend her a staffing factoring line of credit based on the combination of her personal and corporate financials:
Company Balance Sheet
Profits - $1,000,000 a year
Equity - $0 The company, although extremely profitable distributes all the profits to the owner every quarter. Leaving the business extremely over leveraged.
Personal Balance Sheet
Equity - $5,000,000
Although the company is way over leveraged the owner has an extremely healthy personal balance sheet because of her consistent receipt of distributions.
As you can see without her personal guaranty the lender would not receive the benefit of her personal equity and could not extend the staffing factoring facility at the levels the business required.
Small business lenders take personal guaranties not because they like to sue people personally, but because they couldn't make the loan or financial accommodation without it.
Make sure to take the time to read your guaranty and understand how it may affect you in the future. When everything is going well people don't spend a lot of time reading documents like guarantees because they don't think it will ever be called upon. You shouldn't try to understand what your obligations are under a guaranty agreement just after a time when you get some really bad news. Understand your obligations up front.
At Fast A/R Funding we make all of our contracts available for electronic signature but at the same time we encourage our clients to seek advice from qualified counsel before they sign any documents.
Please understand that this blog entry is a brief, informational summary of a very complicated business and legal relationship and the reader should not take this blog as any type of formal legal advice. For better understanding of a personal guaranty agreement, please consult with a qualified, licensed attorney.