Receivables and Inventory

Question 1

Define “pledging of accounts receivable”.

Answer 1

The use of trade accounts receivable as collateral for a short-term loan, usually from a commercial bank or finance company.

Question 2

Distinguish between factoring accounts receivable “with recourse” and “without recourse”.

Answer 2

1. If accounts receivable are factored “without recourse” the factor (buyer) bears the risk associated with collectibility (unless fraud is involved)
2. If accounts receivable are factored “with recourse” the factor (buyer)has recourse against the selling firm for some or all of the risk associated with uncollectibility.

Question 3

Define “factoring of accounts receivable”.

Answer 3

The sale of trade accounts receivable to a commercial bank or other financial institution, called a “factor”. Sale may be “With Recourse” or “Without Recourse”

Question 4

Describe a “terminal warehouse agreement”.

Answer 4

The inventory used as collateral is moved to a public warehouse where it is held as security.

Question 5

Describe the use of an inventory-secured loan for short-term financing.

Answer 5

A firm pledges part or all of its inventory as collateral for a short-term loan.

Question 6

Identify the disadvantages of using inventory-secured loans for short-term financing.

Answer 6

1. Not available for all inventory
2. Pledged inventory may not be available when needed
3. More costly than certain other forms of short-term financing
4. Requires repayment in the short-term

Question 7

Describe a “floating loan agreement”.

Answer 7

The borrower gives a lien against all of its inventory to the lender, but retains control of its inventory, which it continuously sells and replaces.