Pledging Receivables
Pledging Receivables
Pledging receivables means a business using its accounts receivable (money owed by customers) as collateral to secure a loan. Here, the company agrees that if they can’t repay, the lender can collect the customers’ payments.
Using accounts receivable as collateral can be a smart way to improve cash flow, but it comes with responsibilities. Even though the lender holds your receivables as security, you, as the business owner, are still responsible for collecting payments from your customers.
This means that while you get immediate funding, you still have to manage the risk of late or unpaid invoices.
When lenders offer financing based on receivables, they typically limit the loan amount using one of two methods:
- A percentage of total outstanding receivables, usually between 70% to 80%.
- A tiered approach based on the age of receivables, where older invoices may not qualify for funding at full value.

This type of financing, known as pledging receivables, allows businesses to turn unpaid invoices into usable working capital. It provides an immediate cash boost that can be used to cover operational expenses, payroll, inventory purchases, or business growth initiatives.
By securing funds against receivables, businesses can improve liquidity and financial stability, ensuring they can meet short-term obligations even when customers delay payments.
However, since repayment still depends on collecting from customers, businesses must maintain strong accounts receivable management to avoid cash flow disruptions.
Suppose a furniture company has $100,000 in accounts receivable. The company can pledge these receivables as collateral to get a quick loan. If customers default, the lender can collect their payments.
FAQs
What is an example of a pledged receivable?
A pledged receivable occurs when a business uses its outstanding invoices as collateral for a loan. For example, suppose a company has $500,000 in unpaid customer invoices.
To improve cash flow, the business secures a working capital loan from a lender by pledging these receivables. The lender, in turn, agrees to advance 70% of the receivables, providing the company with $350,000 in immediate funding while keeping the invoices as collateral.
The business remains responsible for collecting payments from customers to repay the loan.
What does pledging mean in accounting?
In accounting, pledging refers to using an asset—such as accounts receivable, inventory, or equipment—as collateral for a loan.
When receivables are pledged, they remain on the company’s balance sheet as assets, but a disclosure note is typically added to indicate that they are being used as security for a loan. Unlike factoring, where receivables are sold, pledging means the company retains ownership and collection responsibility.
What is the difference between pledging and factoring receivables?
The key difference between pledging and factoring receivables lies in ownership and collection responsibility:
- Pledging Receivables: The company keeps ownership of receivables and uses them as collateral for a loan. The lender provides funding, but the business remains responsible for collecting payments from customers.
- Factoring Receivables: The company sells its receivables to a factoring company (the “factor”) at a discount. The factor takes over collection efforts, meaning the business no longer has to chase payments.
Are pledges receivable a current asset?
Yes, pledges receivable are typically classified as a current asset if they are expected to be collected within one year. However, if the pledged receivable is due in more than one year, it would be classified as a long-term asset on the balance sheet.
Businesses must carefully track pledged receivables to ensure they have enough liquidity to meet their financial obligations.