Accounts receivable and inventory are some of the most liquid assets a firm owns and their market values are typically fairly close to book value. Even so, in the eyes of many lenders, these assets make for inadequate collateral on loans, particularly if the business looking to borrow the money is in a liquidity crisis. Why do you think this is the case?
What will be an ideal response?
From a lender's standpoint, these assets can make inadequate collateral precisely due to their liquidity. They tend to be assets that are difficult to take a specific security interest in, plus they are easily converted into cash. If a firm runs into financial distress, it is not uncommon for the firm to convert its good receivables and most marketable inventory into cash. If the lender is not monitoring the situation closely, it may find that by the time it becomes obvious the business won't survive, all the good receivables and inventory are gone, leaving a pool of "liquid" assets that have questionable market value.
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