A factoring company will require a client to sign a personal guarantee during the initial contract phase of setting up a new account. It is critical to understand this is primarily a deterrent to malfeasance. In other words, the factor is protecting from outright fraud and stealing. Submitting fake invoices, having fake persons verify invoices, these are typical activities that criminals try to get away with. It is very rare we ever see this happening, but within the factoring industry, it has been known to happen.
A client might be afraid that if a customer simply doesn’t pay an invoice that the factoring company will immediately turn to the personal guarantee. This is absolutely not the case. It is wrong to assume this is how a factor will react. The process of trying to collect any sort of funds from an individual is a long and expensive process. The factor would need to have their lawyer take the individual to court and attempt to get a judgment and then the factor needs to go through the usually lengthy process of collecting on a judgment. Sometimes this can take a year or two.
When a factor finds that a customer is not paying an invoice, no matter what the reason is, they will work with their client to find the most expedient method to have the invoice paid back. Usually this will involve some sort of work out plan where a portion of the advance goes to pay off the old invoice. However the arrangements are made, getting a bad invoice paid off is in the best interest of all parties so the factoring company does not have to resort to the guarantee.