Borrowing Base Lending Glossary
Accounts Receivable (A/R)
Accounts receivables represent the invoiced amounts to be collected from the customers who purchased products or used services and were granted payment terms.
The Advance Rate is the percentage of A/R and/or Inventory that a Lender will use to determine the Borrowing Base. A/R advance rates range from 70% to 80% of eligible accounts. Inventory advance rates typically range from 20% to 50%, depending on marketability.
The amount of available collateral a bank will lend against. The borrowing base is calculated by taking the eligible A/R and Inventory and then applying the advance rate.
Business Loan Agreement
A Business Loan Agreement is a written agreement in place between a Lender and Borrower defining the terms and conditions of eligible collateral, advance rates, loan covenants, and reporting requirements, as well as the loan size and expiration date.
Accounts Over X Days (usually 90 days)
In most cases, asset based lending general guidelines state that ineligible accounts receivable are those accounts 90 days past the invoice date. This could vary if the borrower’s standard terms of sale are extremely long or short. This ineligible category takes precedence over other ineligibles when calculating the borrowing base.
Taint Rule / Cross-aged Accounts (10% rule)
This amount is deducted when a borrower has a customer with balances over 90 days, and also balances under 90 days. The rule states that when a customer has more than X% of their total balance aged over 90 days, the remaining balance is also deducted as ineligible. While 10% is the most common cross-age percentage, lenders will sometimes increase the amount to 15% or 25%. The idea behind this ineligible category is that if a customer has not paid their outstanding over 90 days, it is highly unlikely they will pay the current portion. ZoomBBC has the number of days allowed match what you place as the Over X Days.
Affiliates (intercompany and employee) Accounts
A/Rs issued to related company accounts or employees of the company.
Federal Government Accounts
Eligibility of Federal government receivables is a problem because the bank’s security interest is not recognized by the government unless the bank takes an assignment of claims. Contracts over $1,000 can be assigned (perfected) to a commercial finance lending institution, if the provisions of the “Assignment of Claims Act of 1940” are complied with i.e. the proper paperwork is filed.
Foreign accounts are usually considered ineligible because they are difficult to collect in the event of a default. Canadian accounts are not typically considered ineligible, unless the address of the debtor is in the province of Quebec. Lenders will sometimes lend on foreign A/R’s if the borrower secures insurance through a trade credit insurance company.
Retention is the percentage of payments for job in process that is held back to ensure adequate performance. Retention is considered ineligible because it takes a long time to collect and it is common for disputes to arise regarding payment.
Accounts receivable from customers that also have an accounts payable balance on the aging. Deduct the current portion of any payable balance from the eligible A/R for that customer.
Accounts Receivable from customers where you provided a bond to the customer to guarantee your product or service. The bonding company has the claim to the receivables therefore they are ineligible to pledge to the lender.