Posted in Finance, Accounting and Economics Terms, Total Reads: 336
Definition: Ineligible Accounts
They are the accounts with the money which a company counts as an asset but the lender does not count it as the collateral. They do not satisfy lender's criteria specified in the loan agreement. Those accounts may include the accounts receivable for more than 90 days past the due date, the illiquid investments and also the foreign accounts. Assets that a lender will accept as the collateral include the equipment, an inventory of the socks and also the accounts which are receivable for lesser than 90 days.
If a company requests a line of credit or a loan to the bank, the bank will go through the financial statements of the company. Banks do not accept all the assets as the collateral but only accept some of them when it determines the maximum amount of the loan, a company can borrow. The banks call these assets as the ‘Tangible Net Worth’ of the company. Because a company can include some things like the goodwill the company has in the market, in its balance sheet in the assets side but actually its value cannot be determined so the banks can’t give the loan on such assets. There are some conditions for the loan. The banks require the company to meet the ongoing financial standards which include not taking an additional debt as well as not selling any items off which have been pledged as the collateral.
The reasoning behind why some assets are considered as ineligible for the collateral is that those assets could be too difficult to collect for the lender. It may also be possible that they are too illiquid. In the case of accounts which are receivable for more than 90 days, they are considered as unlikely to be paid in the near future as per the standards followed.