Guaranteeing performance is not the same as guaranteeing payment

"No personal guarantee" is one of the most common things said about merchant cash advances and one of the most commonly misunderstood. Most agreements do contain a personal undertaking. It is just a different kind of undertaking from the one you would sign at a bank, and the difference is narrower in practice than it sounds.

The two kinds

The performance guarantee is the form the purchase framing requires. A funder that buys receipts and can nonetheless collect from you personally when the receipts honestly never materialise is very hard to distinguish from a lender. So the guarantee is drafted to bite on your conduct rather than on the outcome.

Why the distinction narrows fast

The protection is only as wide as the gap between "the business failed" and "the business breached". That gap is defined by the covenant list, and the covenant list is usually long. Typical entries include:

• Blocking, cancelling or interfering with the remittance, or placing a stop payment.
• Closing, changing or diverting deposits away from the designated bank account.
• Changing or terminating the card processor without consent.
• Taking additional financing secured by or repaid from the same receipts.
• Materially misrepresenting anything in the application, the bank statements, or the ownership of the business.
• Selling or transferring the business or a substantial part of its assets.
• Ceasing operations, closing a location, or filing for bankruptcy protection.

Look at that last group. A business in genuine distress does several of those things almost by definition — it stops trading, it closes a site, it moves banks because the old account is overdrawn, it takes emergency money. Each of those is the trigger. The guarantee that only bites on misconduct is one email from biting on misfortune.

How to read yours

1. Find the operative sentence. Look for "guarantees the performance of" versus "guarantees the payment and performance of". The word "payment" appearing anywhere in that phrase changes the character of the document.
2. Read the covenant list in full, then ask yourself which entries a struggling version of your business would trip within thirty days.
3. Check for a bankruptcy trigger. A guarantee that treats a bankruptcy filing as a breach is doing significant work.
4. Check whether the guarantee covers fees and costs, not just the unpaid balance. Attorney and collection costs are where the number grows.
5. Check who signs. If a spouse or a second owner is asked to sign, they are taking on the same exposure. Understand why they are being asked.
6. Check for a separate validity guarantee, which is a narrower undertaking about the truth of what you represented and the integrity of the receivables. Deals marketed as having no personal guarantee frequently still have this one.

What "no personal guarantee" usually means when said out loud

Sometimes it means there is genuinely no guarantee document, which does happen. More often it means one of these:

• There is no guarantee of payment, and the speaker is not distinguishing.
• There is a performance guarantee, which the speaker regards as not counting.
• There is a validity guarantee only.
• There is a confession of judgment naming you personally, which functions like exposure regardless of what the guarantee is called.

Ask a direct question and get a written answer: "Am I signing any document that could make me personally liable for any amount under any circumstances? Which document, and which circumstances?" Marketing claims about personal guarantees in this market have drawn enforcement attention from the Federal Trade Commission under Section 5 of the FTC Act, which is a reason to have the answer in writing rather than on a call.

What happens to the guarantee if you sell the business

A sale or transfer of the business, or of a substantial part of its assets, sits on nearly every covenant list. Selling without consent is itself the trigger, which is a fact worth knowing two years before you plan to sell rather than two weeks.

Two consequences follow.

Your buyer agreeing to assume the obligation does not release you. That assumption is a contract between you and the buyer; the funder is not party to it and is not bound by it. Only a written release from the funder releases you.

And a guarantee that survives the sale leaves you personally exposed to conduct by somebody who now runs the business, controls the bank account, and has no particular reason to return your calls. Every item on the covenant list is now in their hands.

What to do: make payoff at closing a condition, get the payoff figure in a letter with a good-through date, obtain a written release of the guarantee rather than an oral assurance, and confirm the UCC termination yourself afterwards rather than assuming someone filed it.

Who else is being asked to sign, and why

When a funder asks for a second signature, it is usually one of three reasons: the second person owns enough of the business that the funder wants their conduct covered, the funder wants access to a second set of assets, or property rules in that state make one signature less useful than two. Those are different reasons with different consequences for the person signing.

Establish three things before the second signature goes on. Whether liability is joint and several — it usually is, meaning the whole amount can be collected from either of you, not half from each. Whether that person is signing a payment guarantee or a performance one. And whether they are also signing the confession of judgment, if one is in the pack.

Someone who does not work in the business and signs anyway has accepted the full exposure and none of the control. That may still be the right decision. It should be a decision, taken with the document read, rather than a signature collected at the end of a pile.

What you can actually negotiate

Not much, honestly, and less on smaller deals. But three asks are sometimes met:

• Narrow the covenant list, particularly around processor changes and location closures, or add a consent-not-to-be-unreasonably-withheld qualifier.
• Add a cure period. Most of these agreements have none. Even five business days to fix an inadvertent breach is worth asking for.
• Cap the guarantee at the unpaid purchased amount, excluding fees and costs.

If none of it moves, you have still learned the shape of your exposure, which is the point of reading it. Sign knowing that the personal risk in an advance is usually not "will the business succeed" but "will the business, under pressure, do one of these listed things".