California Real Estate Practice Exam

A clothing store owner could NOT use which of the following as security for a loan?

1. Accounts receivable

2. Fixtures

3. Personal note

4. Stock

The correct answer is: Accounts receivable

The correct answer indicates that a clothing store owner could not use accounts receivable as security for a loan. While it is common for businesses to use various types of collateral for securing loans, accounts receivable typically refer to the money owed to a business by its customers for goods or services already delivered. While accounts receivable can sometimes be leveraged for financing, they are generally viewed with more risk compared to physical assets like fixtures or stock. Lenders may prefer tangible assets because they provide a clearer and more direct form of collateral that can be liquidated in the event of default. Fixtures, which include items like display cases and shelving that are affixed to the property, and stock, referring to shares of ownership in the clothing store, are more commonly accepted as secure forms of collateral since they have clear market value and can be sold or transferred. The personal note, which involves a promise to pay that is backed by the borrower's creditworthiness, can also be used to secure a loan. However, it functions differently compared to tangible assets and may not be an option if the question specifically pertains to asset-based security. This illustrates how accounts receivable are treated differently in financial settings, often not qualifying as a solid form of security compared to other asset classes.