Invoice finance is a staple of the recruitment industry for agencies making contract and temporary placements. These bridge the funding gap between when the candidate needs to be paid before the client makes payment. These facilities grow as the agency’s turnover increases and are a great way to provide the funding required. To secure an arrangement, invoice finance companies will ask the directors and/or shareholders to commit to a personal guarantee. There is often apprehension when it comes to signing these guarantees; directors are frequently misinformed about what they are agreeing to when signing on the dotted line.
WHAT IS A PERSONAL GUARANTEE ON AN INVOICE FINANCE ARRANGEMENT?
A Personal Guarantee on an Invoice Finance Agreement is there to get a Directors’ and Shareholders’ buy-in should the business fail.
If the business were to fail the invoicing would stop, the clients would pay the invoices due, and this should clear the balance funded by the invoice finance company. The invoice finance company would typically allow around 90 days for the funds to be repaid.
If a balance is due to the invoice finance company following this process, the directors would owe up to the value of the personal guarantee. For example, if the personal guarantee was £30k and the invoice finance company were owed £3k at the end of the 90 days, the director would owe £3k, not £30k. If the amount due to the invoice finance company is £50k, the Director would pay £30k.
DON’T GET CAUGHT OUT WITH DUMMY INVOICES!
The only case where there could be a balance due over the maximum amount is where fraud was committed and where “dummy invoices” have been raised, uploaded, and funded and will not be paid as they were fabricated. This is one of the main reasons why invoice finance companies want agencies to use a reputable pay-and-bill provider to complete the invoicing/pay-and-bill function to avoid any “dummy invoices” from being raised.
WHAT’S THE PURPOSE OF A PERSONAL GUARANTEE?
The personal guarantee is there to get buy-in from the directors to help with the collections from the clients so the directors don’t just walk away should the company fail.
If the agency has full credit insurance (not Bad Debt Protection), and at the end of the 90 days the clients have not made payment, the credit insurance will kick in and pay the remaining funds to the invoice finance company anyway.
A personal guarantee should never need to be called on by the funder even if the company were to fail, as the clients will repay any funds lent by the invoice finance company.
HOW MAYACHI CAN HELP YOUR AGENCY
We have many years of experience helping to facilitate the setting up of many invoice finance arrangements ensuring that the directors/shareholders are fully aware of what a personal guarantee is. MAYACHI also help agencies to engage a reputable pay-and-bill company and/or train the internal accounts team to ensure that the facility runs smoothly and avoid any cause for a personal guarantee to be called on.
