Excess availability is the amount a business could still borrow on a revolving line today: the lesser of the borrowing base and the commitment, minus loans outstanding, letters of credit issued and any reserves not already in the base. Asset-based lenders use it as their main gauge of risk. They usually require a minimum amount of it at closing, and they set thresholds below which a fixed charge coverage covenant springs into effect, reporting becomes more frequent and the lender takes control of collections. Tracking it monthly, against those thresholds, is the core of managing an asset-based line.
- Formula
- Lesser of borrowing base and commitment − loans − letters of credit − reserves not already deducted
- At closing
- Most asset-based lenders require a minimum amount, after all closing payments
- What it triggers
- Springing covenants, cash dominion and more frequent reporting
- How it is measured
- At any time, or for a set number of consecutive days, as the agreement says
- How to manage it
- A monthly forecast with every trigger drawn on it
How the credit agreement defines it
Most asset-based credit agreements define two related terms. Availability, or the Line Cap, is the lesser of the borrowing base and the total commitment. Excess Availability is Availability minus everything already using it: revolving loans, letters of credit issued under the line, and any reserves that were not already deducted inside the borrowing base.
Read the definition closely, because the variations change the number. Some agreements add unrestricted cash held with the lender, which turns the test into a liquidity test and rewards a business that keeps cash on deposit. Some deduct payables that are past due beyond a set number of days, so a business cannot inflate availability by paying vendors late. Some count letters of credit at their full face amount even if they are unlikely to be drawn. None of these is unusual; each should be priced into how much room you think you have.
There is also suppressed availability: collateral value above the commitment. If the borrowing base is 12,000 and the commitment is 10,000, the extra 2,000 cannot be borrowed, so it is not in excess availability. It is still worth knowing, because it tells you how far the collateral could fall before availability starts to shrink, and it is a strong argument when you ask for a larger commitment or an accordion.
Why lenders set a minimum at closing
An asset-based lender's first question about a new facility is how much room the business will have on day one, after the line pays off the old lender, pays closing costs and, in an acquisition, funds its share of the purchase price. The commitment letter usually makes a minimum level of excess availability a condition to closing.
The reason is practical. A business that closes with little room has no buffer for the first slow collection month, the first reserve from a field exam, or a customer that goes past terms. It would hit its springing triggers almost at once. The minimum at closing is the lender's way of making sure the facility starts in the middle of its range, not at its edge.
Lenders often test the minimum on an adjusted basis. Payables are expected to be within normal terms, so a business that has stretched its vendors to show more availability will see the lender deduct the stretch. In an acquisition, the lender will look at the target's normal working capital, not a month flattered by the seller collecting hard before closing; see how much working capital to finance at close.
If the business cannot close with comfortable excess availability, the line is probably being asked to carry something that belongs in a term loan.
What excess availability triggers
Asset-based lenders usually do without the quarterly maintenance covenants a cash-flow lender would set. Instead, they write a ladder of consequences that switch on as availability falls. The thresholds are stated as a dollar amount, as a share of the commitment or borrowing base, or as the greater of the two.
| As availability falls below… | What typically happens | Why the lender wants it |
|---|---|---|
| The reporting threshold | Borrowing base certificates move from monthly to weekly | Fresher collateral data when the cushion is thinner |
| The covenant trigger | A springing fixed charge coverage test applies, measured on trailing twelve months | Tests cash flow once collateral alone is no longer a comfortable margin |
| The dominion trigger | Cash dominion: collections sweep daily to pay down the line | Puts collections under the lender's control |
| Zero | The line is fully used; any further drop is an overadvance | Collateral no longer covers the loan |
Two details decide how often the triggers bite. The first is measurement: some agreements trigger if availability falls below the level at any time, even for a day; others require it to stay below for several consecutive business days. The second is release: once triggered, the consequence usually lasts until availability has stayed above the threshold for a set period, often measured in consecutive days or weeks. A business that dips below for a day and stays in weekly reporting for two months has learned this the hard way.
Excess availability can also drive pricing. Some facilities price the line on a grid by average excess availability, so a business that stays well inside its line pays a lower margin; see pricing grids.
Monitoring it month to month
The borrowing base certificate tells you where availability was. Managing the line means knowing where it will be. The simplest tool is a monthly forecast that rolls the borrowing base forward from expected sales, collections and inventory purchases, subtracts the expected balance on the line, and draws every trigger across it.
| Month | Borrowing base | Loans and letters of credit | Reserves | Excess availability | Covenant trigger | Headroom |
|---|---|---|---|---|---|---|
| January | 6,200 | 4,300 | 300 | 1,600 | 750 | 850 |
| February | 5,900 | 4,500 | 300 | 1,100 | 750 | 350 |
| March | 5,600 | 4,700 | 300 | 600 | 750 | (150) |
| April | 6,400 | 4,900 | 300 | 1,200 | 750 | 450 |
| May | 7,100 | 4,800 | 300 | 2,000 | 750 | 1,250 |
| June | 7,300 | 4,400 | 300 | 2,600 | 750 | 1,850 |
This business never runs out of room on the line, yet in March the fixed charge covenant springs. If its trailing twelve-month coverage is weak because the prior year was soft, March becomes a default. Seeing it in January leaves time to act: delay a capital purchase, collect a large receivable early, ask the lender for a temporary reduction in the trigger, or have the owners put in cash. Seeing it in April leaves only a waiver request.
The inputs that move the forecast most are the ones the borrowing base is built from. Watch days sales outstanding, since invoices that age past the limit drop out of the base; concentration, since a fast-growing customer can push receivables over the cap; and dilution, since higher credits and returns lead to reserves. A business that tracks these monthly rarely meets its triggers by surprise.
Raising it when it is thin
The levers split into those the business controls and those it negotiates. Within its control: collect faster, clear disputed invoices so they become eligible, sign landlord waivers to remove rent reserves, and keep taxes and protected suppliers current. By negotiation: add inventory or equipment to the base, raise a sublimit, or loosen a concentration cap for a strong customer.
When availability is thin because the line is funding something permanent, such as an acquisition, a capital project or losses, collateral tuning only buys time. The fix is structural: move that amount into a term loan and let the revolver go back to funding the working capital cycle. How lenders size a working capital line and line of credit vs term loan cover the split. For the full monthly method, see excess availability on an ABL facility.
Common questions
- Is excess availability the same as the unused part of my line?
- Only when the borrowing base is at or above the commitment. When collateral is lower, the unused part of the commitment overstates what you can borrow; excess availability is measured from the borrowing base, less reserves and letters of credit.
- Do letters of credit reduce excess availability?
- Yes. Letters of credit issued under the line are usually deducted at their face amount, even though they may never be drawn, because the lender would have to fund them if they were.
- Why does the lender care about availability at closing if I am not planning to borrow much?
- Because it shows how much cushion the facility has before triggers apply. A business that closes with little room will be in weekly reporting, or under a springing covenant, within weeks of a normal slow month.
- Does cash in my bank account count?
- Only if the definition says so. Some agreements add unrestricted cash held with the lender to availability for covenant triggers; many do not.
- How long does a springing covenant stay in effect once triggered?
- Until availability has stayed above the threshold for the period the agreement sets, usually a number of consecutive days. Read the release clause as carefully as the trigger.