The following defines the different types of loans.
- Asset-Based or Asset-Backed Lending: This is a business loan secured by collateral, such as Inventory, Accounts Receivable, equipment and other forms of Balance Sheet assets. It typically provides financing to borrowers who have high Debt-to-equity ratios and low cash flows. Interest rates on these loans are lower than those available to unsecured borrowers.
- Unsecured Debt: This refers to any type of personal or company debt that is not backed by an underlying asset. Examples include credit card debt, medical bills, utility bills and other types of loans or credit that were extended without a collateral requirement. Investment risk is higher than secured debt because nothing secures the lender in the case of bankruptcy.
- Cash–Flow Lending: In this form, the lender provides financing to a company, generally for working capital uses, based upon the expected cash flows generated by the company. This form can be used for other needs, such as acquisitions, recapitalizations, etc. Often, companies in need of cash-flow financing include service companies, marketing firms and manufacturers of low-margin products.
- Factoring: A factor is a financial intermediary that purchases receivables from a company. A factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commissions and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party. This form of financing allows a business to obtain immediate capital based on the future income attributed to an Account Receivable or business invoice.
For more information about debt financing, see “Why do Companies use Debt Financing?”