An eligible receivable is an invoice for goods delivered or services completed, owed by an unrelated, creditworthy customer, with no dispute or offset against it, that the lender could collect in the ordinary course. Lenders exclude invoices more than 90 days past invoice date, the whole balance of customers with too much past due (cross-aging), any customer's balance above a concentration cap, commonly 20% to 25% of eligible receivables, and receivables from affiliates, most foreign and government customers, customers who are also vendors, and anything billed before it was earned.
- Aging cut-off
- Typically more than 90 days past invoice is ineligible
- Concentration cap
- Commonly 20% to 25% of eligible receivables per customer
- Advance on what remains
- Typically 80% to 90% of eligible receivables
- Almost always excluded
- Affiliates, disputed invoices, unearned billings, bill-and-hold
- Usually excluded unless structured
- Foreign accounts, government accounts, contra accounts
Why lenders exclude anything at all
An asset-based lender's collateral is only as good as its ability to turn an invoice into cash if the borrower stops operating. In that case the lender, or a liquidator acting for it, writes to your customers and asks them to pay. Every exclusion in a borrowing base answers one question: would this customer pay a stranger, in full, without argument?
Invoices fail that test for a handful of reasons. The customer may be slow or unable to pay. The customer may have a reason to pay less: a return, a warranty claim, a credit it is owed, an unfinished job. The customer may be hard to pursue: overseas, a government agency, a related company. Or the invoice may not yet represent a finished sale. Each exclusion below is one of those reasons written as a rule.
The standard ineligibles, and the reasoning behind each
| Ineligible category | What it covers | Why lenders exclude it | Can it be negotiated? |
|---|---|---|---|
| Aged receivables | Invoices more than 90 days past invoice date (some agreements measure past due date instead) | Collection odds fall with age, and old invoices often hide disputes | Sometimes, for customers on documented extended terms |
| Cross-aging | All of a customer's invoices once a set share of its balance is aged out | A customer that is not paying old invoices is unlikely to pay new ones | The threshold is negotiable within reason |
| Concentration excess | Any one customer's balance above the cap, commonly 20% to 25% of eligible receivables | One failure should not take out the base | Often, for customers of strong credit quality |
| Affiliates and insiders | Receivables from related companies, owners, employees | Payment can be steered or forgiven; there is no arm's-length pressure | Rarely |
| Foreign accounts | Customers outside the country | Enforcement is slow and uncertain | Often, if credit-insured or backed by a letter of credit |
| Government accounts | Federal receivables, and often state and local | Federal payments cannot be redirected to a lender without Assignment of Claims Act filings | Yes, if the lender completes the assignment for major contracts |
| Contra accounts | Customers who are also your vendors | The customer can offset what you owe it against what it owes you | Excluded only to the extent of the payable; a no-offset letter can help |
| Progress billings and retainage | Invoices for partly completed work, and amounts held back until a job is finished | The customer owes nothing, or can withhold, until the work is complete | Rarely; some lenders to contractors structure around it |
| Bill-and-hold, pre-billing | Goods invoiced but not shipped, or services billed before performed | No completed sale exists yet | No |
| Consignment, sale-or-return, guaranteed sales | Goods the customer may return or pay for only when resold | Payment is contingent | No |
| Disputed, credited or chargeback items | Invoices under dispute, and past-due credit balances | The amount collectible is uncertain | No, until resolved |
Two of these deserve more attention than they usually get. Cross-aging can remove current invoices along with old ones: a large customer that lets a slice of its balance age past the cut-off can take its entire balance out of the base in one month. And concentration is measured against eligible receivables, not gross, so a business that loses eligibility elsewhere sees its concentration excess grow at the same time.
Dilution: the ineligible you cannot see on the aging
Dilution is everything that reduces an invoice between billing and collection other than bad debt: credit memos, returns, rebates, early-payment discounts, pricing adjustments, write-offs of small balances. It does not appear as a separate line on the aging, which is why lenders measure it at the field exam by comparing what was billed with what was actually collected.
The advance rate already leaves room for some dilution. When measured dilution runs above what the advance rate allows for, lenders respond in one of two ways: they cut the advance rate, or they impose a dilution reserve. Either reduces availability. Businesses with volume rebates, promotional allowances or frequent returns, such as consumer-goods distributors, should expect this to be examined closely, and should be able to show how rebates are accrued and when credits are issued.
A worked example
A business services company has gross receivables of 2,000 (in thousands). Its largest customer owes 700. Another customer owes 150, of which 90, more than half, is past 90 days from invoice. A related company owes 60, and a customer that also supplies the business owes 80 while being owed 50.
- Over 90 days past invoice across the book: 120, of which 90 belongs to the slow customer
- Cross-aged: the slow customer's remaining current balance of 60 comes out too, because more than half of its balance is past the cut-off, a common cross-aging threshold
- Affiliate: 60
- Contra: 50, the amount the business owes the customer who is also a vendor
- That leaves 1,710 before concentration. Capping the largest customer at 25% of that figure limits its 700 to about 428, so about 272 more comes out. Some agreements measure the cap against eligible receivables after the excess is removed, which cuts deeper
- Eligible receivables: about 1,438. At an 85% advance rate, receivables availability is about 1,222
Gross receivables of 2,000 became availability of about 1,222. The biggest single cost was concentration, followed by one slow customer whose 90 of old invoices took 150 out of the base. Neither shows up as a problem in the owner's own reporting, which is why the first lender conversation can be a surprise.
Concentration is measured against eligible receivables, so every other ineligible makes the concentration cut bigger.
How to clean up an aging before it goes to lenders
Most of the gap between gross and eligible receivables is housekeeping, not credit. The work below is worth doing before any lender, or any examiner, sees the aging:
- Reconcile the aging to the balance sheet. An aging that does not tie to the general ledger is the fastest way to lose an examiner's confidence, and with it the higher end of the advance-rate range.
- Apply unapplied cash and open credit memos. Unapplied receipts leave paid invoices showing as aged, and old credits appear as past-due credit balances. Both inflate ineligibles.
- Write off what you will not collect. Invoices you already know are dead only cross-age the rest of that customer's balance.
- Know which date your aging uses. Lenders generally measure from invoice date. If your system ages from due date, a customer on long terms looks current to you and aged to the lender.
- Separate what lenders will exclude anyway. Break out affiliates, retainage, progress billings, foreign and government customers, and customers who are also vendors, so the lender sees you understand your own collateral.
- Run a concentration schedule. List your largest customers as a share of the total, with their payment history. If one is large and of strong credit, that is the case for a higher cap.
- Fix billing practice, not just the report. Invoicing before shipment or before the work is done will be found at the field exam and treated as a control failure, not an ineligible.
Transparent's line of credit checklist asks for the AR aging by customer with days outstanding, and the AP aging alongside it, because the two together show aged items, concentration and contra accounts at a glance. The rest of the list is in how a borrowing base works.
What is negotiable, and what the alternatives are
Eligibility definitions are drafted by the lender, but they are not all fixed. Terms that are commonly discussed:
- A higher concentration cap for a named customer of strong credit quality
- Longer aging for customers on documented extended terms, sometimes with a lower advance rate on those invoices
- Eligibility for foreign receivables backed by credit insurance or letters of credit
- Eligibility for major federal contracts once the assignment formalities are complete
- Clear limits on the lender's right to add new ineligibles after closing
Terms that are rarely moved: affiliates, bill-and-hold, pre-billing and disputed items. A business whose receivables are mostly in those categories is not a good fit for a conventional borrowing base.
When eligibility does not work, the question becomes which structure does. Factoring buys invoices customer by customer and can suit a concentrated or young book. A cash-flow line ignores eligibility and sizes on earnings. For contractors with heavy retainage, a term loan sized on cash flow may do more than a line. Of the lenders in Transparent's book, 235 write asset-based loans and lines and 116 write factoring, and their eligibility definitions differ enough that the same aging can produce very different availability from one to the next.
Common questions
- Are receivables over 90 days always ineligible?
- Receivables more than 90 days past invoice are typically ineligible. Some agreements measure from due date instead, and some allow longer periods for named customers on extended terms. Read the definition of eligible receivables in the term sheet.
- What is cross-aging?
- A rule that removes all of a customer's invoices, including current ones, once a set share of that customer's balance is past the aging cut-off. The logic is that a customer not paying its old invoices is a risk for its new ones too.
- Why is my largest customer only partly eligible?
- Borrowing bases commonly cap any single customer at 20% to 25% of eligible receivables. The balance above the cap is excluded. A higher cap can sometimes be negotiated for a customer of strong credit quality.
- Can I borrow against receivables from a government agency?
- Federal receivables are usually ineligible unless the lender completes the assignment filings federal law requires. Lenders will often do this for larger contracts. State and local receivables vary with the lender and the jurisdiction.
- Do unbilled receivables count?
- Generally not. Unbilled work, progress billings and retainage are usually excluded because the customer does not yet owe a fixed amount. Some lenders to specific industries make limited exceptions, usually at lower advance rates.