Pledging Receivables

What is Pledging Receivables?

Pledging receivables is when your business uses a receivable as collateral for a loan from the bank to help manage problems with their cash flow. Usually the loan amount is only 70-80% of the invoice receivables or – more commonly – an amount based on the age of the receivables. Receivables that are overdue or have very long credit terms are generally not acceptable as collateral by banks and third parties.

How Pledging Receivables Works

Similar to invoice financing, the steps of pledging accounts receivables include:

Step 1) A manufacturing company wants to borrow $250,000 on April 30, 2023 and agrees to repay the loan by November 30, 2023. It pledges $300,000 in receivables.

Step 2) The lender reviews documents such as past invoices, late payments and credit history from those customers to help evaluate the manufacturing company’s creditworthiness and risk.

Step 3) Based on their document review, the lender decides on the amount of the loan they are willing to give and the terms of the loan such as the interest rate and timeline for repayment.

Step 4) The lender delivers funds to the manufacturing company, taking into consideration issues such as returns, deductions and allowances.

Step 5) The customers pay the manufacturing company and it returns the money to the lender with interest. In the event that the customers do not pay the manufacturing company, the lender will collect the money independently.

The Advantages of Pledging Receivables

Pledging receivables borrows the money against receivables rather than an asset like a traditional loan. Since it is not technically a loan, it has a number of advantages.

They include:

A simple process. Since a lender can quickly evaluate your ability to pay back the loan by analyzing the DSO, creditworthiness of the customer, and credit history, lenders can predict the likelihood that your business will pay back the loan according to the specific terms they determine.
Access to quick cash. Rather than waiting for customers to pay their invoices, pledging receivables offers access to immediate cash similar to invoice factoring, but typically with better terms.
It does not impact customer relationships. Although you are still responsible for collecting payments from customers, your business is not forced to escalate dunning workflows or pressure your customers to make timely payments to have access to quick cash. In the event that your customers are unable to pay, the third party lender collects the payment from your customers.
Better terms on the loan. Since the third party or lender can more easily quantify risk of giving your business a loan, pledging receivables offers a lower interest rate than many other types of loans and doesn’t impact your credit score.
Facilitates a streamlined credit application process. To be eligible for a loan from a bank or third party, your business must demonstrate that it has the internal processes in place to manage debt. Having customer data available to your entire financial team in the same centralized place is a crucial part of building this process.

When to Consider Pledging Receivables

Businesses resort to pledging receivables when they need access to quick cash but want to maintain control over their receivables. This could be due to anything from unforeseen operational expenses to launching new products and entering new marketing or taking advantage of supplier discounts. Pledging receivables are a good option for businesses who have excellent credit with customers yet want to minimize the risk involved in loans, since pledging receivables generally offers more flexible terms.

How Gaviti Helps You Successfully Pledge Accounts Receivables

Gaviti’s invoice-to-cash A/R management platform helps your business streamline the entire accounts receivable process, ensuring that your business presents data accurately and simply throughout the entire financial department and third parties as well. By eliminating manual processes and human error, your A/R team has more time and resources to focus on more important tasks, such as optimizing your cash flow and mitigating risk.

Working together, these different modules include:

Cash Application. Automated matching of invoices to payments and options for both single and multi-bank connectivity gives you improved visibility into your cash flow not only for your A/R team but for your entire business so that everyone can work together to make better decisions.
Credit Management and Monitoring. Deliver a simple credit application process for your customers, enabling you to set credit limits, and request and approve credit so that you have a trustworthy credit audit trail that third parties can use to determine your creditworthiness. It also helps you detect potential delinquencies early, so you can avoid having to turn to pledging receivables to solve your cash flow issues in the first place.
Collection Analytics. Get advanced analytics that includes A/R team performance metrics and KPIs in real-time, enabling you to send reports quickly to lenders and external auditors and increase your chance of approval for a loan.
Customer Self-Service Portal. Allow customers a full range of payment options, including credit cards, debit cards, ACH transfers, electronic wallets, as well as integration with secure payment gateways such as Bluesnap and Stripe. The Gaviti platform also provides a payment portal for customers to make payments online in a timely manner.
Dispute and Deduction Management. Keep track of data such as dispute details, deduction reason codes, communication history and other relevant documents to accurately classify, track, and gain insight into recurring issues to proactively minimize their occurrence in the future.

Want to learn more about how your business can gain better visibility into your A/R process and improve your cash flow? Speak to a Specialist to see how Gaviti works.