Equipment / Inventory / Accounts Receivable

I had to refer to Article 9 to make sure I understood the difference.   We all know about cash collateral.  The most common business assets that are used for procuring a loan is inventory / equipment / accounts receivable.  Let’s break down the difference in order to understand what the secured creditor has a lien against.

Equipment –> long-term assets that the business uses for its daily operations.  Example is printing machinery, forklifts, cash register, meat cutters, refrigerator/freezer, tortilla making machine.   In a pizza shop, this would be the dough machine, oven (albeit a fixture too), etc.

Inventory –> short-term assets that are either made by the business or used by the business.  In a pizza shop, this is the flour, marinara sauce and cheese. See UCC Section 9-102(a)(33) and (48).

Accounts Receivable –> this is money that others owe the business.  In a pizza shop, if it catered a party and sent an invoice for $500 to be paid in 10 days then that $500 is accounts receivable to be received in future.  UCC Section 9-102(a)(2).

Example:  In a grocery store, which of the following would not be “inventory”?   Plastic wrap for deli, canned corn, meat cutters, cash register tape.   Here, canned corn is inventory because it is something the business sells as part of its business and turns it into cash.  Cash register tape and plastic wrap is also inventory because the business uses them for a short-term despite the fact the business does not sell them.  The meat cutter is not inventory but rather equipment.

Who cares?   Well the secured creditor cares to identify what is its collateral and it is important for the business (debtor) to know what is cash collateral.

Leave a Reply


five × 7 =