What Are the Different Types of Cash Collateral?
Cash collateral is a term that is used to identify various types of negotiable assets that can be converted into cash with little or no delay. This is different from assets that are considered hard collateral, such as machines or equipment, that would generally take longer to convert into cash and would likely be necessary in the ongoing operation of a business enterprise. Assets of this type are often defined by bankruptcy and other financial laws, and are also governed by laws that affect the settling of estates. There are several different types of liquid assets that are generally classed as cash collateral, making it easier to determine how to treat those assets in a given situation.
For the most part, cash collateral is any asset that has a proven cash value that can be realized quickly. The most common example of this type of collateral is cash on hand. This would include actual currency that is in the possession of the owner, both coins and paper money. In addition to currency, cash collateral would also include assets like the balances in checking and savings accounts, since those balances can easily be accessed and used to conduct transactions, including settling debts and making purchases. Even bank accounts such as certificates of deposits may also be classed in this category, depending on the banking laws that apply and what would be involved in cashing out those assets if necessary.
Other types of financial assets can also be considered cash collateral. For businesses, the current balance in the accounts receivable is considered this type of asset. Accounts receivables are based on the invoices issued to clients for goods and services rendered. As payments for those invoices are received, the collected cash can likewise be used to manage daily operating expenses and settle other types of debt.
Defining certain financial assets as cash collateral can be important in a number of situations, including the filing of bankruptcy action with an eye toward gaining protection from the courts from creditors. Typically, certain types of bankruptcy will require that companies liquidate some assets in order to settle part of their debts, but also offer some protection for cash collateral, since those resources can be used to help the business continue to operate and eventually come out of the bankruptcy protection when the business is once again generating significant profits. Even in situations that do not involve bankruptcy, identification of certain assets as cash collateral can be helpful in estate planning, settling the estate of a deceased party, and determining which tax tables apply to those particular assets.
Discuss this Article
Post your comments