## Pledging of Receivables
Pledging of receivables is a short-term financing method where the firm uses its trade receivables (debtors) as collateral (security) to obtain a loan. The firm does not sell the receivables — it merely pledges them.
### How It Works
- Lender assesses the quality of receivables and advances 50% to 90% of the receivable amount.
- The firm remains responsible for repaying the loan regardless of whether customers pay.
- This is a secured loan — must be repaid.
### Advantages
| Advantage | Explanation |
|---|---|
| Easy Funding | Regular and readily available |
| Flexible | Funding level adjusts with receivable volume |
### Disadvantages
| Disadvantage | Explanation |
|---|---|
| High Cost | Interest rates can be significant |
| Balance Sheet Impact | Loan appears as debt, worsening the debt-equity ratio |