Guides / Receivables and ABL
What do lenders exclude from a borrowing base?
Lenders advance only against eligible receivables, and they routinely exclude invoices that are too old, balances from customers who pay slowly across the board, amounts above a single customer limit, receivables offset by what you owe that customer, and foreign or government accounts without extra protection. Because exclusions come off before the advance rate is applied, the borrowing base is often well below what an owner expects.
Why receivables get excluded
An asset based line is sized to what a lender could actually collect if it had to. Every exclusion answers one question: would this invoice turn into cash if the lender stepped in and collected it? Invoices that are old, disputed, offset or hard to enforce fail that test, so they come out of the borrowing base before the advance rate is applied.
The exclusions are written into the loan agreement and recalculated on every borrowing base certificate, the weekly or monthly report showing your receivables, the exclusions and the amount available to draw.
The standard exclusions
| Exclusion | What gets excluded and why |
|---|---|
| Past due invoices | Invoices outstanding too long. A common standard is about three times normal terms: on net 30 terms, invoices more than 90 days from invoice date, or 60 days past due. Old invoices often signal a dispute or a customer in trouble. |
| Cross aging | When a set share of one customer's balance is past due, the lender excludes that customer's entire balance, including current invoices. Published examples of the threshold range from 20% to 50%. |
| Concentration | Amounts owed by one customer above a set share of total receivables. Only the excess is excluded. A 20% limit is a common example. |
| Contra accounts | When a customer is also your vendor, the amount you owe them is excluded, because they may simply net it against what they pay you. |
| Affiliates | Receivables from related companies. Their finances tend to move with yours, and they may offset amounts owed. |
| Foreign customers | Customers outside the United States, because a U.S. lender may not be able to enforce collection. Credit insurance or a letter of credit acceptable to the lender can often make them eligible. |
| Federal government | Excluded unless an assignment of claims is in place, because the government can otherwise keep paying you rather than the lender. |
| Disputed or doubtful accounts | Invoices in dispute or subject to offset or counterclaim, and balances owed by customers that are insolvent or in bankruptcy. |
| Not yet earned | Prebills and deferred revenue, invoices sent before goods ship or work is done. Consignment sales and cash on delivery accounts are also typically excluded. |
| Bonded work | Receivables on bonded contracts, where a surety may have rights to the payments ahead of the lender. |
Exact thresholds are negotiated and set in each loan agreement.
How the exclusions add up
Illustrative example. Not a specific client or transaction.
A distributor has $3.0 million in receivables and applies for an asset based line with a 20% concentration limit and an 80% advance rate.
- $240,000 is more than 90 days from invoice date.
- $110,000 is the current balance of one slow customer whose past due share crossed the cross aging limit.
- $50,000 is owed back to a customer that is also a supplier.
- $150,000 is owed by customers in Canada and Mexico without credit insurance.
- $387,500 is the amount of the largest customer's $800,000 balance above the 20% concentration limit.
Total exclusions are $937,500, about 31% of receivables. Eligible receivables are $2,062,500, and at 80% availability is about $1.65 million, not the $2.4 million the owner expected from 80% of total receivables.
What you can fix before you apply
- Collect or resolve old invoices. Past due balances cost you twice when they trigger cross aging on a customer's current invoices.
- Net out contra balances. Settling what you owe a customer who is also a supplier removes the exclusion.
- Insure foreign receivables. Credit insurance or letters of credit can bring foreign customers into the borrowing base.
- File assignments on federal contracts. Without them, government receivables usually do not count.
- Negotiate the limits that matter to you. A higher concentration limit for a large, creditworthy customer, or a cross aging threshold that fits your industry, can be worth more than a higher advance rate.
- Clean up your aging report. Unapplied cash, credits and duplicate invoices make receivables look worse than they are, and examiners will find them.
Advance rates come after exclusions
Owners often focus on the advance rate, but the rate applies only to eligible receivables. Commercial receivables commonly support advances of around 75% to 80% of the eligible amount, sometimes more for strong receivables, depending on the lender. Reducing exclusions often adds more availability than a few points of advance rate.
Estimate your own borrowing base
Enter your receivables, aging and largest customer share to see an indicative range.
Sources
General information, not legal, tax or financial advice. Examples are illustrative. Terms vary by lender, and all financing is subject to lender approval.
What owners ask us first.
Can I negotiate borrowing base exclusions?
Often, yes. Concentration limits for strong customers, cross aging thresholds and the treatment of foreign receivables with credit insurance are common points of negotiation. The terms are set in the loan agreement, so they are worth settling before you sign.
Why did my availability drop when my sales went up?
Growth with one large customer can push balances over the concentration limit, and slower paying new customers can create past due and cross aging exclusions. Total receivables rose, but eligible receivables did not keep pace.
Are federal government receivables eligible?
Usually only once an assignment of claims is filed under the Assignment of Claims Act. Without it, the government can keep paying you directly, so lenders exclude those invoices.
What is a borrowing base certificate?
A regular report, usually weekly or monthly, listing your receivables, the exclusions and the resulting availability. The lender uses it to set how much you can draw.
How much can I borrow against my receivables?
How lenders turn total receivables into a borrowing base, from eligible receivables and advance rates to reserves and the line limit.
Read the guide →How the Assignment of Claims Act works when you finance federal receivables
What the Assignment of Claims Act requires, why lenders insist on it, and the filing mistakes that delay federal contractor financing.
Read the guide →