A guarantee has numerous meaning, but the basic one we find in most of the dictionaries is the assurance for the fulfillment of a condition. However, when it comes to business, this term is applied to various cases. Some of given to customers, some to lenders, and others to third parties.
To help you understand the legal and financial structure, we are going to help you make a difference between various types of guarantees and here is the necessary information on each of them.
If your business obtains financing, then you might need to give a personal guarantee. In this case, if your business fails and you are unable to repay the loan, then you are on the hook, which means you will have to use personal financial means to clear the debt. If you are married, then your spouse is required to give a personal guarantee as well.
When using a personal guarantee, you may not only be responsible for the balance of the loan, but also for interest, fees and any other costs. The personal guarantee is used for various cases, for instance, SBA loans, vehicle purchase, leases, and business credit cards.
This is a less comprehensive guarantee which is used by factoring companies. However, it’s not very common among small or medium-sized businesses. In this case, the invoices your turn over to a factory are valid, they aren’t pledged to another company and are collectible.
With this type of guarantee you also promise that if you receive a payment on an invoice you have turned over to the factory, you will remit the funds to the factory. However, unlike the previously mentioned guarantee, you don’t have to tie your personal assets to customer default.
Advanced payment guarantee
If you ask a buyer, or a client to make an upfront payment, in most cases, that’s 20% of contract price, then he may ask for reassurance of repayment if the contract fails, or the terms and conditions aren’t fulfilled.
The bank can offer this as an advanced payment guarantee, which is insurance to return the deposit if the contract is breached. If you are doing business with various supplies, then we would advise you to get an advanced payment guarantee because this is the only way to secure your money and protect your company from fraud.
A warranty is also a type of guarantee. In this case, you are asserting customer that products and goods they are selling are good. If you are standing behind your goods, then you need to know the different types of warranties and be sure to what you are promising to your customers.
Implied warranty – it means that goods you are selling is good and nothing’s wrong with it.
Express warranty – these are the promises you make, regardless If they are written or said verbally. It also means that customers will get their money back if they encounter some problems.
There are two types of bonds:
Performance bonds – if you win a bid, but you fail to perform a business, then the contractor will be used the bond you put to complete a project.
Bid bond – this might be required if you want a public contract. It assures you will complete the work on time.