The Risk of Bank-Owned Payroll Funding,
Bank Factoring Programs, and Banks

A bank-owned payroll funding company or bank (which may have quoted what initially sounds like a lower rate) can ultimately be the most costly of all funding. The higher risk and cost is often embedded in the bank’s legal document - a bank-style personal guaranty, which may present danger to any personal assets you have or may have in the future. They can present risk not just to you but also to the other business guarantors (family members, business partners, investors, etc.) if any. The elements contained in a bank personal guaranty are not defined as "collateral", but may amount to additional collateral.

The legalese in bank-style documents is the toughest when signing up for money-only funding programs, without back office services. Providing back office support services and payroll services along with the funding gives the bank organization much more control over the cash, so the guarantees tend to be lighter in those arrangements.

Always notice the bank personal guarantee style; a guaranty is the one document often formatted to seem less threatening or as an afterthought of little importance. Compare the basic funding agreement with the separate guaranty; the guarantee may have much smaller print, less spacing between words, letters, and lines, and a change of font to help mask its legal and financial severity. Such effects disguise that a guaranty is longer in length than the guaranty of some other funding company. One carefully formatted page can quickly turn into three pages of harsh legal clauses when blown up to a size that is actually readable.
(See Section on How Tough Personal Guaranty Clauses May Effect You)

Bank guarantees in money-only funding programs have teeth and are more likely to be enforced if something goes wrong. This is due to bank management orientation & bureaucratic organizational structure. Nobody within a bank organization wants to be the one to say, "let’s take a bad-debt hit on this deal," and then push hard within the organization to follow through with a write off. There are too many people looking over their shoulder and too many people they are accountable to: stockholders, Federal Bank Regulators, multiple levels of management. There’s too much bureaucracy and explaining to do to easily accept bad debt losses. Enforcing their documents/guarantees is what they are more geared to doing.

Even if you don’t have a lot of assets to go after, the stress, time, and attorneys fees to defend yourself can smart. Whether you have assets or not, you can be sure in bank-style legal documents that you are going to be paying ALL of the bank’s legal fees and expenses to enforce the guaranty. You have to pay all fees related to any court, proceedings, judgments, etc. You may have to pay all legal fees related to enforcement of the personal guaranty, even if it never actually ends up in court. Be sure and check legal responsibility clauses in both the guaranty and in the financing or factoring agreement.

Notice the venue of the guaranty. Each state’s laws tend to vary in handling, interpreting and enforcing personal guarantees. Some states are good at protecting consumers/business consumers, others tend to favor businesses (including funding companies) located in their own state. With a bank-owned funding division, you will probably not see use of an arbitration clause for a personal guaranty. If an arbitration clause is ever used, it will not be a simple arbitration clause—there will usually be extra legal teeth included.

This discussion doesn’t necessarily mean that an independently owned (non-bank owned) payroll funding company won’t enforce a personal guaranty. They can, and do, especially in cases of fraud.

Bank Credit Reporting

It is possible through your personal guarantee that a bank or bank-owned funding company may affect your personal credit history and credit score. A tarnished record history will likely prevent you from securing small business loans in the future. The banking industry believes that history is a good predictor of your future behavior. If your company defaults on a business loan, it is more likely for a bank or bank-division funding company to report it to credit bureaus, whereas most independently-owned funding companies do not regularly report to credit bureaus.