Collateral Damage Control

Sadie Keljikian, Express Trade Capital

If you need to finance your business, you will be required to provide collateral. No matter what kind of funding you seek out, nearly every bank and private financial institution will require an asset to secure the loan. This makes a lot of people nervous, the word “collateral” has developed an unfortunate connotation of expendability and brings foreclosure to many minds. Fortunately, this doesn’t mean that you’ll have to risk losing your business, home, or savings. Unbeknownst to many, collateral can take many forms and most business owners aren’t aware of the full scope of their options.

Collateral is a general term for assets against which a bank or private lender can provide your business with funding. Aside from the well-known practice of using buildings, equipment, or savings as collateral, trade financing also allows the use of accounts receivable, inventory, and purchase orders. Trade finance can offer solutions to numerous business models thanks to a variety of lending options. This means that you can receive funds to supplement your operational costs without risking your business or crucial assets.

With solutions like factoring and purchase order financing, you can borrow against existing orders for which you have yet to be paid. This is an excellent solution for vendors selling to retailers on open terms and allows you to increase your business’s cash flow without incurring long-term debt or potentially sacrificing your business.

If you own a retail shop or other store-front type of business, a merchant cash advance may be the best solution for you. MCAs are loans against your day-to-day credit card sales. You receive one lump sum and the lender takes a portion of your credit card sales until your loan and interest is repaid. Again, this means that your sales are your collateral, leaving you less at risk of losing vital capital.

The collateral you offer also helps to establish and raise your credit line in trade finance. This means that as long as you keep making sales and your customers pay on time, your credit with your lender will remain strong. You can fulfill as many orders as needed without worrying about deficient operational funds. Trade financing is also immensely helpful in padding out your working capital without accruing interest on the funds you’ve received. When your customer accepts the sale, the documentation thereof (either a purchase order or an invoice) becomes valuable for trade financing and leaves your jurisdiction. You receive payment earlier than you would have, minus fees, and are able to continue running your business without the concern of costs outweighing revenues.

In short, collateral is not a dirty word. Despite the understanding that your lender will hold a lien against your assets until you’ve repaid your debt, you can borrow funds to keep your cash flow healthy without fear of losing everything. Financing in smaller amounts and against your active assets allows you to grow with the knowledge that you are both sufficiently funded and protected from crucial losses.

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