Question

Scenario: You recently became a partner in a firm. After working there for 6 months as a partner, you attend a meeting regarding a business loan that is up for renewal. You discover that the collateral for the loan is all of the accounts receivable. Do you have an issue with using the accounts receivable for collateral? Why or why not?

Answer 1

Facts of the Case: The Loan is Cash Credit, where ALL Account receivable is kept as a collateral with the financial Institution.

Issue: AR can be used as a Collateral or not , if Yes, then why whole?

Explanation: On Apparent view, the Partnership firm has taken loan for working capital requirement by keeping whole AR as Collateral against the Working capital Loan. It means that the firm is in Trading of business where stock is not stay tuned at the end of the year. ( Value accumulated in Closing stock as Immaterial) , So Financial Institution has charged against AR, seeking the AR is increasing over a period.

Same can be issued as Collateral, but the management should make an effort to recover their dues from customers, It should not be like that the Availing loan against AR as flow of cash is their instaed of paid by Customers, such attitude is not good attitude and will lead to bankruptcy.

The AR charged by FI is appropriate and same is against all AR is appropriate action. But the Management action should be initiated for the recovery of such AR so that firm can proceed over the closure over such limit or reduce the same.

Conclusion: The FI can charged against All AR because as per the Loan value the FI have to made secured the complete loan value.