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Using Collateral to Secure Accounts Receivable.
A trade creditor can become a secured creditor if they obtain a pledge of collateral from a debtor in connection with their extension of credit. Collateral involves assets of the borrower/customer that are offered to the credit/lender to secure a loan or another form of extension of credit, creating a secured debt or secured obligation. Collateral then becomes subject to seizure if the borrower defaults on payments of interest or principal.
Collateral involves one or more assets pledged as a security. In the context of collateral pledged to a trade creditor by a debtor, if the debtor defaults on payment the creditor can - at least in theory - take title to and possession of the pledged assets. Collateral is pledged by a customer to a creditor using a document called a Security Agreement. A Security Agreement must include a clear and written description of the collateral offered as collateral, and should state that the security interest attaches to all similar types of collateral owned or subsequently acquired by the debtor, as well as any proceeds cash generated if the debtor sells the collateral they have pledged as security.
To be fully enforceable, a Security Interest should be Perfected. The process requiredtoperfis explained elsewhere in the Encyclopedia of Credit. Drafting of a Security Agrement should be done by an attorney. Many creditor companies use third party service providers to ensure that their Security Agreement and interest in pledged assets is properly filed to ensure that the guarantee they have is fully enforceable.
Edited by Michael C. Dennis. Mr. Dennis is a business consultant. He can be reached by email at mcdennis13@yahoo.com