Meaning
Collateral management standards identify physical raw materials and finished goods suitable for asset based borrowing capacity. Eligible inventory consists of merchantable goods, raw materials, and finished product inventory that meet lender criteria for liquidation value and physical accessibility. Lenders exclude work in process, custom items, and damaged goods from borrowing base formulas.
Exclusion Standard
Locations outside primary corporate warehouses or third party facilities without landlord lien waivers are routinely disqualified. Definitions governing eligible inventory restrict slow moving stock, obsolete parts, and goods held on consignment. When inventory fails quality checks or sits past defined shelf life limits, lenders remove those items from collateral calculations.
Disqualifying goods stored in transit ensures lenders retain direct access to physical assets during enforcement scenarios.
Valuation Basis
Borrowing availability relies on lower of cost or net orderly liquidation value determined by independent appraisal. Qualified eligible inventory receives advance rates typically ranging between fifty and sixty five percent of appraised net liquidation value. Price drops in secondary markets directly reduce the borrowing power generated by physical inventory reserves.
Monitoring Regime
Periodic perpetual inventory counts and physical inspections confirm the existence and condition of pledged assets. Lenders adjust eligible inventory balances based on quarterly appraisal updates and perpetual inventory count reporting. Discrepancies between recorded book inventory and physical count results force immediate reductions in borrowing availability.
