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What is pledged inventory?

When a bank or creditor issues a loan to a borrower, the borrower typically needs to offer collateral. The collateral is used to secure the loan so that if the borrower defaults, the creditor is left with something of value to offset the lost cash on the loan.

For a company that is required to have a large amount of inventory on their balance sheet, they can use “pledge the inventory” as collateral on a loan. If a company pledges inventory to secure a loan, this arrangement needs to be disclosed in the notes to the financial statements.

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