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Secured Business Loans and invoice discounting are both great ways to get quick cash for your company. Both involve drawing against your outstanding invoices or accounts receivable to increase your working capital.
Secured Business Loans, also called debt factoring or asset securitization, involves selling your invoices to a third party, usually a bank or financial institution. In exchange for the accounts, you’ll receive up to 85 percent of the total value in cash. After that, the responsibility of collecting the debt lies in the hands of the factoring company.
The greatest benefit to factoring is that you don’t have to wait for invoices to be paid in order to collect the cash you need. In most cases, you’ll receive the cash within 24 hours of signing a contract with the factoring company.
- Lower interest rates - Secured loans have lower interest rates because the bank is not taking on as much risk.
- Higher borrowing limits - If you need a large sum of money, a secured loan is usually the way to go. Banks are comfortable lending more money, again because they’re not taking on as much risk.
- Longer repayment terms - Secured loans tend to have longer repayment terms, which translates to lower monthly payments.
- Risk losing assets - With a secured loan, you’re putting important assets on the line, whether they’re business or personal assets. If your business fails or falls into hard times and you default on the loan, those assets disappear.
With an unsecured business loan, no collateral is required. The amount of money that is loaned and interest rate is based solely on your credit history, income and assets. Unsecured loans are riskier for the lender than secured loans.
Consumer equivalents of unsecured loans include credit cards, personal loans, student loans and payday loans.
- No risk to assets - With an unsecured loan, you’re not risking valuable business or personal assets. Even if you default on the loan, the lender cannot seize any property or income (however, you never want to default on a loan).
- Cheaper than credit cards - For smaller purchases, unsecured loans are preferable to using a credit card. The interest rates can be high, but they’re not as high as credit cards.
- High interest rates - Lenders charge higher interest rates for unsecured loans because they’re taking on additional risk by not requiring collateral.
- Strict requirements - Most lenders will require a good credit history and at least two years of business experience. And because of the added risk, the lender is likely to spend extra time scrutinizing your assets and balance sheets. The approval process can be lengthy.
- Lower borrowing limits - The amount you can borrow tends to be less with an unsecured loan. And the amount of time you have to pay back the loan is usually much shorter.
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