Factoring Accounts Receivable: Why Factors Require Personal Guarantees
If you’re reading this blog you are most likely a small to medium sized business owner or financial associate within a business searching for financing. You could be searching for an explanation why there are certain requirements when factoring accounts receivable. You might possibly just wondering why Factors require a personal guaranty.
Let me tell you a bit about myself so you realize I’m certainly not a “newbie” to the industry and can really relate to the needs of the small or start up business owner. I’ve been involved in finance for 22 years and more specifically invoice purchasing or factoring for over 13 years. I’m especially proud to say that I have been a part of helping numerous businesses achieve the foundation to reach the next steps to their ultimate goal of financial business independence.
I’ve lived and worked in large markets such as Chicago and smaller markets like Oklahoma. However, no matter where you are located across the country the basic needs of businesses are the same, they all need working capital on a steady basis to survive.
Factoring your accounts receivable is a great way to give you the working capital your firm must have so you can meet your daily operational needs such as;
- Making payroll
- Purchasing inventory
- Funds for advertising
- Possible growth
A huge difference also being just a simple personal guaranty is required to secure the agreement. You don’t have to take out a second or third mortgage on your residence or tie up any of your personal assets as collateral.
Personal guarantees are the minimal requirement of all factoring and asset based lending institutions. If an unfortunate situation arises, after all efforts have been exhausted and your business assets are unable to satisfy your debt, in laymen’s terms they merely state you will agree to pay the remaining liability. Not really much to ask when all things are considered.
At this point I’m sure you have already attempted to obtain a loan at a more conventional source such as your local bank or credit union. You might have been advised that your firm didn’t meet certain criteria and unfortunately they were unable to provide your company any type of financing. It’s possible your firm is too small and the amount you’re seeking doesn’t meet their minimum requirements. It could be the fact your firm is unprofitable or maybe a start-up company and doesn’t have enough of a track record to qualify for a conventional loan. Well let me tell you if this is your situation, you’re certainly not alone.
After the crash of the housing market along with the demise of numerous businesses, today’s banks, credit unions, and other financial institutions have been more ultra conservative than ever before when it comes to loaning money. With that being said, the requirements and stipulations they have established have been even more demanding.
The collateral they now require to secure the loan sometimes seems to be more than what you’re even looking to borrow. I’m surprised they haven’t gone as far as require a security interest in the work capabilities of your first born or grandchildren. Okay, I know a bit extreme, but I think you get the point I’m trying to make.
When making your final decision on choosing a factoring/invoice purchasing facility it’s important to make sure you have an experienced staff along with a firm that has state of the art technology. This will make the process from submission to the funding of your receivables as stream-line as possible.