All forms of lending fall into two basic types: secured and unsecured. If a loan is unsecured, there is no underlying asset that the lender can get their hands on, should the borrower default on the repayments. If a loan is secured, there is an underlying asset that is used as collateral for the loan. If the borrower defaults on the loan repayments, the lender takes possession of the asset and converts it into money to repay the loan. A classic example is a mortgage on a property. If the mortgage holder is unable to repay the mortgage, the lender will take possession of the property. Another example is a hire purchase arrangement to buy a car. If you fail to make the repayments, you can wave goodbye to the car!
Factoring companies must be aware of the likelihood of fraud occurring and protect themselves through a range of defensive measures.