Question

Hi, I have a quesion of the meaning of sentence:

Comanies can sometimes use their receivables as collateral for borrwing money. The level of accounts receivable also affects
several important financial-performance measure, including working captial, days payable,.

I don't understand why they can use recevable as collateral. What is receivable has to with collateral.
Please explain to me.
Thanks.

Answer 1

It should be noted that Accounting Receivable is an asset, a current Asset. For a Lender, It becomes imperative to have a certain kind of security or say collateral security from which he can realize money later on if the borrower is unable to pay money.

Now, Borrower can use any of it's business asset as collateral security for loan unless and until Lender also agrees with it.

In some cases like a Leasing company, Lender will always be convenient with the receivables as collateral since it is the main core business of Leasing Company i.e. borrower.

Just like Receivables, a company may use its inventory or other current short term investments.

Please note Receivables are assets which has some value and In agreement with Lender, it can be used as collateral security. Hope this explanation clarifies your doubt.