Paper Topic:

Accounting

Accounts receivable

Accounts Receivable : Pledging vs . Factoring

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Accounts Receivable : Pledging vs . Factoring

The revolving credit arrangement is termed as account receivable Companies can choose from two different ways of using these accounts receivable in to make the process of receiving cash from the receivables faster . These ways are pledging and factoring

Pledging is considered as an agreement wherein the collateral for loans are the receivables while factoring is selling the companies receivables in to speed up their receipt of cash . This

is usually done by industries involving in furniture , textile , etc

These two ways of using accounts receivable has differences in their procedures and arrangement . In pledging , once the seller of the goods and the financing institutes has established their agreement , the seller will provide invoices to the financing institution from time to time Then , the lender will review the invoices and makes credit approvals of the customers . In this kind of operation , it is the selling firm that will carry the loss in case of bad debts . At every stage of operation the financial institution tries to protect itself from losses . They do strict selections of invoices they give loans that are less than 100 of the pledged invoice and the lender still has recourse against the selling firm . It is also in this operation where the company 's customers are usually not notified about their account . There are cases when they continuously remit to the company because they are not informed that their account has been pledged as collateral for a loan

On the other hand , factoring began to operate just like pledging by establishing an agreement between the seller and the factor . There is also an approval from the factor before shipment of goods . However factoring differs from pledging in terms of payment . In factoring , the buyer is usually notified by the financial institution to give their payments to them and not to the selling firm . This is because the financial institution assumes bad debts . Another difference is that pledging has a lender and factoring has a factor . The lender is only responsible for lending while a factor is responsible for three major functions . It checks credits and do risk-bearing , as well as lending However , these roles of a factor could result to different combinations depending on the provisions that both the seller and the factor have agreed upon . Factoring can also be with or without recourse but generally , it is operated without recourse to the borrower . It means that the lender will be the one to have losses in case of bad debts

References

Guin , L . Glossary . Pledging vs . Factoring of Accounts Receivable Retrieved May 8

2008 from http /campus .murraystate .edu /academic /faculty /larry .guin

Pledging , Assigning and Factoring receivables . Other Assets , Liabilities and Disclosures

Chapter 11 , page 2 . Retrieved May 8 , 2008 , from http /www .wiseguides .com /lambers /pdf /V1_CHAPTER_11 .pdf

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