Meaning
Borrowing base formulas evaluate outstanding customer invoices against specific quality and age standards to determine secured lending limits. Eligible accounts receivable represent the portion of unpaid customer invoices that satisfy a lender’s legal, operational, and credit risk guidelines. Secured lenders apply advance rates only against these qualified invoices to determine available revolving credit lines.
Ineligibility Rule
Unpaid invoices beyond ninety days from invoice date or sixty days past due are excluded from collateral calculations. Standard definitions of eligible accounts receivable also exclude foreign receivables, cross aging balances, affiliate invoices, and government accounts lacking assignment approvals. When a single customer accounts for more than ten percent of total receivables, the excess concentration portion becomes ineligible.
Disqualifying disputed invoices prevents companies from borrowing against uncollectible billings.
Advance Rate
Secured lenders calculate total credit availability by multiplying qualified invoices by an agreed percentage, typically eighty to eighty five percent. Reductions in eligible accounts receivable directly decrease daily borrowing capacity under asset based revolving loans. Companies monitor collection cycles closely to minimize collateral disqualifications that strain operational cash availability.
Verification Process
Detailed reports submitted weekly or monthly list gross invoices alongside specific category exclusions. Audits of eligible accounts receivable occur through periodic field exams that cross reference customer ledgers against bank deposits and shipping documentation. Inaccuracies in reporting lead to borrowing base adjustments or immediate mandatory loan repayments.
