Borrowing Base Eligibility: What Lenders Exclude from Your Collateral

An asset-based credit facility or AR line is sized by its borrowing base, but the number that drives availability is not the receivables and inventory on your balance sheet. It is eligible collateral, what remains after the lender removes everything it is not willing to lend against. Many companies are surprised by how far availability falls once those exclusions are applied, and the gap is usually discovered after the facility has already been sized around gross figures.

Aged Receivables and Cross-Aging

Most lenders exclude invoices once they pass an aging cutoff, commonly 90 days from invoice date or 60 days past due. Older receivables are harder to collect, so they drop out of the base entirely rather than being advanced at a lower rate.

Cross-aging can remove more than the aged invoices themselves. If a large share of a single customer's balance, often half, is past the cutoff, the lender may treat that customer's entire balance as ineligible, including current invoices.

Concentration Limits and Ineligible Accounts

Lenders cap how much of the borrowing base any single customer can represent. Balances above the concentration limit are excluded unless the customer is an exceptionally strong credit. Beyond concentration, several categories are frequently carved out:

• Receivables from affiliates, related parties, or employees
• Foreign receivables not backed by credit insurance or a letter of credit
• Government receivables where assignment of claims requirements have not been completed
• Contra accounts, where the customer is also a vendor and can offset what it owes
• Progress billings, retainage, and bill-and-hold invoices

Inventory Eligibility

Finished goods and raw materials are the most likely to qualify. Work in process is often excluded or heavily discounted because it is difficult to sell in a liquidation. Slow-moving or obsolete stock, consigned goods, inventory in transit, and inventory held at third-party locations without a landlord or bailee waiver are also commonly removed.

Eligible inventory is advanced against a percentage of cost or net orderly liquidation value, and many facilities add an inventory sublimit that caps how much of total availability can come from inventory at all.

Reserves and Dilution

After eligibility is applied, lenders may subtract reserves for items that could take priority over their claim, such as rent at leased locations or unpaid payroll taxes. Dilution matters as well. If credits, returns, and allowances regularly reduce what customers actually pay, the lender may lower the advance rate or add a dilution reserve to reflect it.

Availability is the result: eligible receivables and inventory multiplied by their advance rates, less reserves, less the outstanding balance. That figure, not gross collateral, is what the business can actually draw.