Using Account Receivables as Collateral

A business will use their account receivables as a way to collateralize a loan. Accounts receivables represents those accounts of the business that are active and have paid or are in the process of paying for goods or services provided by the business. The receivables represent a steady flow of cash for a business. The steady cash flow is assessed as a good source of income for securing a loan.

Types of Business Using Account Receivables

Using account receivables as collateral is good for those businesses with a steady flow of income but may have some credit issues. These credit issues could be making it difficult for the business to take out loans and more importantly, limiting access to the additional funding needed to expand operations or hire additional employees. Collateralizing the loan with account receivables gives the lender assurance that the loan can be paid and a source in which to tap into.

Secured Loan

A business loan that is collateralized with a company's account receivables is a secured loan. This differs from an unsecured loan that does not require the use of collateral or some type of security in order for the loan to be made to the borrower. A secured loan will have a higher interest rate than one that is unsecured.

Loan Arrangement

A business pledges their account receivables by assigned a portion (collateral) or all (absolute) of their receivable for a period. This can be for the term of the loan, or some other period agreed upon by the borrower and the lender. The terms and conditions of the loan are set forth in the loan agreement.

As the loan is paid off, arrangements can be made between the loan's parties to reduce the amount of account receivables that is needed to collateralize the loan. Typically, the lender will accommodate this request as long as the borrower continues to make the required payments as scheduled.  

Common Practice

Collateralizing a loan with account receivables is a common practice for many businesses in need of additional capital. The lender will review the business' financial statements and other information to ensure that the business is a viable business with earning potential.