When requesting financing, such as a bank loan, there are a series of necessary requirements through which the approval of your credit request and the amount to be financed will be evaluated.

One of these requirements is collateral, which, in general terms, serves to guarantee that the debt will be settled in the event that your company does not have sufficient funds to be able to meet the payment of the debt.

For this reason, the collateral has become an obstacle to accessing financing, either due to the lack of this guarantee or because you have already occupied all the provisions for past financing.

In this post, we explain what collateral is and what are the best financing options that do not require it.

What is collateral?

Collateral is a property or asset that serves as a guarantee against the concision of financing, as is the case with bank loans or credits.

These assets can range from real estate belonging to the owner or shareholders of the companies (houses, land, etc.), to machinery, vehicle fleet, bills receivable, and other investments.

In most cases, when a natural or legal person requests a loan or financing, this collateral guarantee will be required to obtain it, since in this way the risks for the lender are reduced in case the debt cannot be settled.

In this way, the lender would take legal possession of the property or collateral asset in exchange for payment of the debt. Loans without collateral are known as “unsecured loans”.

Advantages and disadvantages of collateral

There are advantages and disadvantages to collateral, both for the lender and for the person seeking financing. Some of the advantages are:

• The credits are more accessible in case your credit history is not excellent.
• In general, interest rates decrease when there is collateral involved.
• Lines of credit or amounts financed tend to be higher than when there is no collateral.
• It is a good way to build a credit history.
• The lender ensures your money.
• On the other hand, some disadvantages are:
• The application processes are usually longer since the financial institution has to evaluate the value of the collateral.
• In the event of a default on the debt, you may lose your property or asset.

Financing without collateral: an advantage of financial factoring

There are sources of financing that do not require collateral to be able to grant lines of credit. One of these sources is financial factoring, which consists of the acquisition of accounts receivable by a factoring institution (called a factor) that advances you a percentage of the net value of the invoice and, at the time your buyer settles payment, the factor gives you the other percentage minus a commission.

Factoring has positioned itself as a great option for companies seeking financing since it has great advantages compared to traditional financing sources such as bank loans.

Some of these advantages are the speed of the financing request, the involvement of technology to make the processes more agile and that collateral is not required to complete the credit application.

According to an analysis by Drip Capital México, a company that specialized in factoring, up to 50% of the companies that go to them do so because they do not require collateral. This is because the invoice itself is a guarantee of payment.

In this way, many companies that already have their assets or properties compromised and that are looking for more financing to grow their business, resort to factoring as an option to avoid stagnation in case they need to improve their liquidity or cash flow.

Financial factoring has become a great ally for companies that encounter great challenges when applying for loans.