Sears extends credit to its customers to purchase appliances, furniture, and other goods. Sears could borrow from a bank using its accounts receivable as collateral, thereby placing debt on the balance sheet. Sears would then use the cash collections from the receivables to repay the bank loan with interest. Instead, Sears sells the accounts receivable to the bank for an amount that is less than the cash the bank expects to collect from receivables purchased. The amount takes account of expected defaults, which would reduce the cash generated by the receivables. This difference between the amount paid to Sears by the bank for the receivables and the amount that the bank expects to collect from the receivables provides the bank with its expected return. In this scenario, Sears has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet.

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