Characteristics of Secured Short-Term Loans
Collateral and Terms
- Lenders prefer collateral that has a life, or duration, closely matched to the term of the loan
- Liquid current assets, such as accounts receivable and inventory, are the most preferred collateral
- The terms of the loan usually include a percentage advance of 30% to 100% of the book value of the collateral, that then constitutes the principal amount of the loan
- The interest charged is typically higher than on unsecured loans because of the greater risk of default and higher costs of negotiating and administering a secured loan
- Collateral reduces the risk of loss in case of default, but does not change the risk of default
- 1994, HarperCollins Publishers