30 Jun 3 Ways to Use Your Accounts Receivables as Collateral
Businesses that are short of working capital can find it difficult to buy equipment, hire employees, or grow. One of the toughest jobs as a business owner can face is seeking a company loan. Due to the extreme risks in most businesses, few banks will extend bank loans to them, especially those who have been in business for less than a certain amount of time, or who have credit or cash flow issues.
Using your accounts receivable or the credit accounts of the clients to get loans for business is another way of raising funds for the needs of working capital. Account receivables represent those accounts of the business that are active and are in the process of paying for goods or services provided by the business. In general, receivables represent a steady flow of cash for a business. The stable cash flow is assessed as a good source of income for obtaining a loan.
In certain circumstances, a business can use its account receivables as a way to collateralize a loan. This tactic is often widely referred to as pledging in the accounting world and largely used by many businesses that do not have physical equipment or assets.
LET’S SEE THREE DIFFERENT WAYS ON HOW TO USE ACCOUNTS RECEIVABLES AS COLLATERAL
- SECURE LOAN
A business loan that is collateralized by receivables from a company’s account is a secured loan. It varies from an unsecured loan and does not require the use of physical collateral or any form of protection for the borrower to obtain the loan. A secured loan would have a lesser rate of interest than an unsecured one.
- DURATION OF LOAN
For a defined period of time, a company can pledge all or only a portion of its account receivables. The duration of the loan or loan arrangement is negotiated between the company and the lender, and all details are stated in the terms and conditions of the loan.
- REGULAR PAYMENTS
Once the loan is paid off, agreements may be made between the parties to the loan to minimize the number of account receivables required for the loan to be collateralized. Usually, as long as the borrower continues making the necessary payments as planned, the lender can accommodate this request.
Collateralization of a loan with accounts receivable is a common practice for many companies that need extra capital. The lender must review the financial statements and other details of the company in order to make sure the business is a success with earning potential.
HOW TO SHOW ACCOUNTS RECEIVABLES AS A COLLATERAL ON A REPORT?
Here are several ways to display receivable accounts as collateral on reports.
- OVERALL BALANCE ACCOUNTS RECEIVABLE
The amount of collateral should also be included in the “assets” section of the balance sheet. Be sure to exclude any accounts which are doubtful. Doubted accounts are those accounts which are unlikely to be collectible.
- . NOTES AND DESCRIPTIONS
Make sure to note in the accounts receivable section when sending your report to your lender claiming that the X sum of accounts receivables is used as collateral.
- . LIABILITIES
Based on the amount of time given for the loan or credit line, whether short-term or long-term — be sure to record the collateral in the correct section of the liabilities.
Using accounts receivable as a collateral for a loan or credit line is a viable financial choice for most of the businesses. Ultimately, accounts receivable reflects a stable cash flow needed to secure a loan or credit line.