Most short-term business loans are unsecured, which means that an established company’s credit rating qualifies it for a loan. It is ordinarily better to borrow on an unsecured basis, but frequently a borrower’s credit rating is not strong enough to justify an unsecured loan. The most common types of collateral used for short-term credit are accounts receivable and inventories.
Financing through accounts receivable can be done either by pledging the receivables or by selling them outright, a process called factoring in the United States. When a receivable is pledged, the borrower retains the risk that the person or firm that owes the receivable will not pay; this risk is typically passed on to the lender when factoring is involved.
When loans are secured by inventory, the lender takes title to them. He may or may not take physical possession of them. Under a field warehousing arrangement, the inventory is under the physical control of a warehouse company, which releases the inventory only on order from the lending institution. Canned goods, lumber, steel, coal, and other standardized products are the types of goods usually covered in field warehouse arrangements.
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