A lack of collateral can greatly inhibit your company’s ability to grow. You might not be able to obtain traditional financing through banks or credit unions, but this does not mean you have no means with which to secure capital for expansions and other growth-oriented goals. One option is Invoice factoring uk.
What is Invoice Factoring?
Invoice discounting or factoring is a way to secure financing without having to put up collateral. Essentially, you are obtaining a loan against the invoices your customers or clients have not yet paid. When those invoices are fulfilled, the lender keeps the funds as payment for having extended the loan in the first place.
There are two forms of Invoice finance: factoring and discounting. With factoring, your customers know you are using a factoring service, and your loan is predicated upon the credit worthiness and fiscal stability of those payors. Discounting, on the other hand, is secured privately without your customers’ knowledge, and your business is granted the loan based on your company’s solvency and credit history.
Is Collateral Required for Discounting or Factoring?
You do not have to put your equipment, merchandise or other assets on the line when you obtain a loan through discounting or factoring. This is because your clients’ invoices are considered security for the loan. Even if you have collateral to put up for a traditional loan, you might prefer discounting or factoring as a way to secure capital.
This is primarily because you do not have to consider the loan as a debt. You do not have to pay it back through your company income; instead, that money is automatically withdrawn from a bank account through the supplier. You receive the money you are owed ahead of time rather than taking out a loan that you must repay on a set schedule.
Additionally, if you need additional financing down the line, your factoring or invoicing arrangement does not count as a debt. Other lenders will not have to consider the money you received from the supplier in deciding whether or not you qualify for financing.
Should You Avoid Collateral-Based Loans?
When you leverage your assets for a bank loan, you put those assets in jeopardy. If something goes wrong and you are unable to fulfill your obligation, the bank can repossess those assets, which could effectively bankrupt your business.
A better solution is to obtain financing without any collateral involved. You will not have to worry about losing your assets, nor do you have to count the money as a debt against your business.