In pledging, the firm offers its receivables as security for a cash advance. The lender who accepts and discounts the receivables may be a commercial bank or a specialized industrial finance company. The first step in setting up a pledging relationship is to negotiate a formal agreement between the borrower and the lender. Once the agreement has been reached and a legal contract signed, the borrower can begin to present its receivables. The lender gives the borrower the face value of the invoices less its own charges. That is, the lender buys the invoices at a discount, paying less than the amount it hopes to collect. Almost all pledging agreements have two important provisions: the lender’s right to recourse, and its right to reject invoices. In the event that the customer defaults and fails to pay the sum invoiced, the borrower is obligated to assume responsibility for the outstanding amount. The lender also has the right to select only those invoices that it will finance and reject those it considers too risky. It is estimated that the rejection rate could reach as high as fifty percent. Pledging, or discounting, receivables is not a cheap source of credit. During most of the 1980s, when the commercial bank lending rate varied between 8 and 15 percent, the cost of discounting was about 20 percent. Similar rate differentials exist today. In addition, the lender often charges yet another fee to cover its expenses to appraise credit risks. Consequently, this source of short-term financing is used mostly by companies that have no other source of funds open to them, primarily smaller companies. For such companies, however, this offers two advantages. First, after the initial agreement has been reached, the method is fairly informal and automatic, except for the rejection of invoices for bad risk. Second, the customer being invoiced receives no information that the borrowing company is in financial trouble; he or she simple sends in a check in the normal way and never knows that it has been assigned to a third party. For this reason, pledging receivables is sometimes called nonnotification financing.