Security required by an invoice factor or discounter

The main security that an invoice factor or discounter has is based on the trade debtors of the business which are assigned under the terms of the financing agreement.

However, it is also common for secondary security to be supplied in the form of director's warranties/guarantees.

Director's unsupported personal guarantees are occasionally requested to support the agreement. 'Unsupported' being a personal assurance to the value of £ X and not the charging of specific personal assets.

It is often the misconception of directors that where personal guarantees are provided this is merely to assure assistance to the factor/discounter in collecting in debts should the company cease to trade. Whilst this guarantee certainly gives the factor the leverage to ask this of the directors and is a significant motivating factor in their request of these assurances, it should be very clear that a personal guarantee will give personal liability against the funds borrowed. Whilst the factor/discounter will seek to collect monies in from debtors firstly they are fully entitled to approach the directors for all or any of the amounts remaining outstanding.

Some factors will request director's warranties. These do provide director liability, although only in certain circumstances detailed in the respective document. These often relate to circumstances where fraudulent notification of invoices etc has occurred or cash has been misappropriated. As such these are occasionally referred to as fraud warranties.

If you are unsure about the extent of your liability consult your solicitor before signing anything that provides any personal warranty or guarantee.

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You may also find our business finance glossary of terms useful.