Source: Image of safe, check, curved arrow, table, block arrow, t-shirt, images by Video Scribe, License held by Jeff Carroll; Image of boxes on pallet, Public Domain, http://bit.ly/WIXhhi.
Hi, I'm Jeff. And in this lesson, we'll learn about secured short-term financing and discuss a few of the basic types. So let's get started. If a business is unable to obtain enough financing with unsecured credit, then it might use collateral to gain additional funding.
Companies that need to do this are often less credit worthy. Nearly any asset in a business can be considered for a collateral, but typically inventories and accounts receivable are preferred by financial institutions. Let's discuss how this will work.
Some loans are secured by inventory. This type of loan can be used for any business that has inventory on hand. For example, a retail business is a good fit for this type of loan, while a service company is not.
This type of loan is straightforward, since the collateral is a physical good. Other loans can be secured by receivables. Generally, this type of loan can be used by any business. And it might be good for companies with longer sales or production processes.
One type of receivable loan is factoring accounts receivable, which is a loan which bridges the gap prior to the sales of goods. A factor is a business that exclusively buys other firms accounts receivables for the purpose of making money. The business that sells their accounts receivable gets less than face value, but it still benefits the company because they get funds immediately before their accounts receivables are due.
The factor business is then responsible for collecting the accounts receivable at the full value. So they make money. Typically, companies with large numbers of customers on credit use a factor business to offset the risk of this type of loan.
An example of a loan secured by inventory might be a furniture retailer that needs a loan for cash flow and consistently has a large inventory of furniture available. The lender will evaluate the amount of inventory normally held then use that as security for the loan. An example of a loan secured by receivables might be a manufacturing company that needs to fund the manufacturing process for a new product and bridge the gap until the product is actually available for sale.
A T-shirt company, for example, might need to purchase the raw materials such as fabric, labor, thread, and design used in creating T-shirts. So they need a loan until the shirts are made and sold to stores. The lender would evaluate the orders for existing T-shirts, then secure the loan with those accounts receivables so the company could fund the new design.
OK, nicely done. In this lesson, we learned about secured short-term financing. We talked about the types of collateral used to secure this financing. And we discussed examples of short-term secured financing Thanks for your time, and have a great day.