What Is Accounts Receivable Pledging in Business Financing?

When researching some of the different ways to finance your business, you may come across accounts receivable pledging. It’s commonly used to secure business loans. With accounts receivable pledging, you can obtain a loan from a bank or alternative lender. Not all lenders require accounts receivable pledging. Rather, it’s an optional financing vehicle. What is accounts receivable pledging in business financing exactly?

What Is Accounts Receivable Pledging in Business Financing?

Overview of Accounts Receivable Pledging

Accounts receivable pledging involves the use of accounts receivable as collateral for a secured loan. All secured loans require the use of collateral.

There are secured loans and unsecured loans. The former requires the use of collateral, whereas the latter does not. While you can often use a variety of asset types to secure a loan, accounts receivable pledging specifically involves the use of accounts receivable as collateral.

How Accounts Receivable Pledging Works

As previously mentioned, accounts receivable pledging is offered by banks and alternative lenders as a method for obtaining a secured loan. When applying for a secured loan, the lender will require you to provide collateral. Collateral consists of assets that can be converted into cash.

You’ll retain ownership of the collateral, though, as long as you repay the loan according to the lender’s terms and conditions. Accounts receivable pledging is a form of debt financing in which you use your business’s accounts receivable as collateral to obtain a secured loan.

Accounts receivable, of course, is an asset. It’s the money owed to your business from its debtors. A common example of accounts receivable is an unpaid invoice. If your business has outstanding invoices that haven’t been paid by its customers or clients, you can use them to obtain a secured loan. Accounts receivable pledging means that you are “pledging” your business’s “accounts receivable” as collateral.

Benefits of Accounts Receivable Pledging

With accounts receivable pledging, you don’t need stellar credit — or even any credit for that matter — to obtain a loan. Lenders often provide loans to businesses with bad credit or no credit, assuming they pledge their accounts receivable.

Accounts receivable pledging also allows you to keep your business’s pledged assets. It’s simply used as collateral, and like all forms of collateral, you’ll retain ownership of it as long you can comply with the lender’s terms and conditions. Other forms of accounts receivable financing, such as factoring, involve the sale of these assets. Accounts receivable pledging is different in the sense that the assets are simply used as collateral to obtain a secured loan.

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