Equipment service and repair companies usually borrow on an asset-based line with two parts. Repair and maintenance invoices typically advance at 80% to 90% of eligible receivables; parts inventory advances at up to 85% of net orderly liquidation value, or roughly half of cost, and often much less for slow-moving or brand-specific parts. Lenders strip out maintenance contracts billed before the work is done, treat manufacturer warranty claims separately, and exclude customer equipment sitting in the shop. A perpetual inventory system and clean parts records usually decide how much of the inventory counts.
- Receivables
- Typically 80% to 90% of eligible repair and service invoices
- Parts inventory
- Up to 85% of net orderly liquidation value, or roughly half of cost, less for slow movers
- Usually excluded
- Prebilled maintenance not yet performed, customer-owned equipment, obsolete parts
- Handled separately
- Manufacturer warranty claims, floor-planned new units, service vehicles
- What decides the inventory advance
- A perpetual inventory system, cycle counts and an appraisal
Where the cash sits in a service business
Companies that maintain and repair industrial machinery, material handling equipment, compressors, generators, pumps, commercial kitchen equipment or electronic and precision instruments share a working capital pattern. Technicians are paid every week or two. Parts are bought ahead so that a truck or a shop can fix a machine on the first visit. Customers are billed after the work, on trade terms, and the manufacturer pays warranty work on its own schedule.
That leaves cash tied up in three places at once: receivables from completed work, parts on shelves and in service vehicles, and jobs in the shop that are partly done and not yet billed. Only the first two can support a borrowing base, and each has its own rules.
The cycle is steadier than in construction or agriculture, but it is not flat. Generator and pump service spikes after storms; refrigeration and cooling service peaks in hot months; agricultural and construction equipment dealers' service departments follow their customers' seasons; plants schedule major maintenance during planned shutdowns. A company should know its own curve and show it to a lender, because it determines when the line is fully drawn.
Receivables: not every invoice is the same
A service company's aging mixes several kinds of billing, and lenders separate them. The general rules are in eligible vs ineligible receivables.
| Receivable | Typical treatment | Why |
|---|---|---|
| Time-and-material repair invoices, completed and signed off | Eligible | Work done and accepted; the strongest collateral the company has |
| Scheduled maintenance billed after each visit | Eligible | Performed and billed like any service invoice |
| Maintenance contracts billed annually or quarterly in advance | The unperformed part is ineligible | The customer owes nothing for visits that have not happened, and can cancel |
| Manufacturer warranty claims | Often a separate, lower advance or excluded | The manufacturer can reject or charge back claims, and pays on its own terms |
| Invoices more than 90 days past invoice date | Ineligible | Standard cut-off |
| Customers who also sell to the company | Offset amount excluded | A supplier-customer can net what it owes against what it is owed |
| A customer above the concentration cap | Excess ineligible | Commonly 20% to 25% of eligible receivables per customer |
Prebilled maintenance contracts cause the most surprises. Companies often bill a year of preventive maintenance up front and record the full amount as a receivable. A field exam will find it, remove the unearned portion from the base, and may ask why the balance sheet does not show deferred revenue. Billing contracts monthly or quarterly as the visits happen avoids the issue.
Warranty claims deserve their own line in the aging. Manufacturers pay dealers and authorized service centers for warranty repairs, but they can reject claims for missing documentation and reverse claims later in an audit. Lenders treat rejections and reversals as dilution, and a company with a large warranty book should show its claim approval history by manufacturer.
Parts inventory: worth more to you than to a lender
A parts inventory is valuable to the business because it lets technicians finish jobs on the first visit. To a lender it is valued at what it would bring in a liquidation. Inventory typically advances at up to 85% of net orderly liquidation value, or roughly half of cost, and parts inventories often recover far less than cost in an appraisal because so much of the stock fits only certain models.
| Type of parts inventory | How appraisers and lenders commonly view it |
|---|---|
| Fast-moving consumables: filters, belts, fluids, fasteners | Best value; broadly usable and easy to sell |
| Brand-specific parts for current models | Moderate value; saleable to other service companies and dealers for the brand |
| Parts for discontinued or older models | Low value; few buyers |
| Stock with no movement over a long period | Often excluded as slow-moving or obsolete |
| Remanufactured parts and cores held for exchange | Case by case; depends on a market for the cores |
| Parts in service vehicles | Can be eligible if tracked by vehicle; excluded if not |
| Consigned stock owned by a supplier | Excluded; it is not the company's inventory |
The single biggest factor is record-keeping. A lender can only advance against inventory it can see: counted, costed, and located. Companies that expense parts when bought, keep no perpetual count, or cannot tell which van holds what usually get little or no inventory advance, whatever the stock is really worth. A perpetual inventory system with regular cycle counts, a reconciliation to the general ledger and an aging of each part number turns the inventory into collateral. The details are in how lenders advance against inventory.
If parts are expensed when bought, the balance sheet shows no inventory and a lender has nothing to advance against. Fixing the books comes before asking for an inventory line.
Where the parts sit in a leased building, lenders often ask the landlord to sign a landlord waiver allowing access to the inventory, or hold a reserve for rent in its place.
Customer equipment in the shop
Shops hold machines that belong to customers: a forklift in for a rebuild, a pump being overhauled, an instrument awaiting calibration. That equipment is not the company's property and is never collateral, but it creates two issues a lender will ask about. First, it has to be clearly separated from the company's own units in the records and on the floor, so a field examiner does not count it and a liquidator does not sell it. Second, work partly done on it is unbilled, so the labor and parts invested are not yet a receivable.
Large shop jobs can tie up a lot of cash before billing. Companies that take deposits or bill progress on major rebuilds keep that cash cycle shorter, and lenders view progress billing on an approved quote more favorably than a single invoice at the end.
Vehicles, rental fleets and dealer floor plans
Service vans and trucks are usually financed separately, with the vehicle lender holding a purchase-money security interest ahead of the line lender. Owned vehicles and shop machinery free of other liens can sometimes support a term piece alongside the revolver; see machinery and equipment in an asset-based loan.
Companies that also rent equipment, or that are authorized dealers selling new units, add two more layers. A rental fleet is equipment collateral, usually financed on its own terms. New units bought from a manufacturer are commonly financed on a floor plan through the manufacturer's finance arm, which takes a lien on those units and often on related parts and receivables. The line lender and the floor plan lender then need an intercreditor agreement dividing the collateral. A dealer agreement that the manufacturer can terminate is also a risk the lender will read closely, because losing the franchise can end the warranty business and devalue brand-specific parts at once.
Covenants and reporting
- A borrowing base certificate monthly, or weekly when availability is tight, with receivables by customer and inventory by category.
- Inventory reports from the perpetual system, with slow-moving stock identified.
- An inventory appraisal before closing and periodically after.
- Field exams that test invoices against work orders and sign-offs, and count sample inventory.
- A fixed charge coverage covenant, often springing at non-bank lenders and tested regularly at banks.
- An inventory sublimit capping how much of the line can come from parts, so the facility stays mainly a receivables line.
The general menu is in the covenants on a line of credit.
What trips equipment service companies up
- No perpetual inventory. The most common reason a service company's line is smaller than expected.
- Advance-billed contracts recorded as receivables and removed in the field exam.
- Warranty claims rejected for paperwork, then left in the aging.
- Obsolete parts on the books at cost, which the appraisal writes down and the lender excludes.
- Shop work unbilled for too long, especially large rebuilds finished weeks before invoicing.
- Technician shortages that leave revenue capped while fixed costs keep running; lenders ask about hiring and retention.
- Vans and tools financed with cash advances that file liens on receivables; see refinancing out of cash advances.
Preparing the file
Transparent's line-of-credit checklist: AR aging by customer with days outstanding; AP aging; balance sheet; P&L; year-to-date P&L through last month-end; a debt schedule showing existing liens; the inventory report, since inventory will be part of the base; and bank statements and two to three years of business tax returns where available. Service companies should add a list of maintenance contracts showing how each is billed, warranty claims outstanding by manufacturer, the equipment and vehicle list with lienholders, and any dealer or floor plan agreements.
Transparent's lender book holds 235 lenders that write asset-based loans and lines and 244 that write equipment, which matters when vehicles and shop machinery need their own financing alongside the line. Once the documents are in, Transparent builds the lender package in a day. Buyers should start with financing an equipment repair business acquisition; SBA figures for the industry are in SBA loans for machinery and equipment repair.
Common questions
- Why did my lender value my parts inventory so far below cost?
- Lenders advance on net orderly liquidation value, the price a liquidator would realize over a reasonable sale period. Brand-specific, older-model and slow-moving parts have few buyers, so they appraise well below cost, and stock without movement is often excluded altogether.
- Can I borrow against maintenance contracts I bill a year in advance?
- Only the part for work already performed. The unearned balance is not owed until the visits happen, and the customer can often cancel, so lenders remove it from the borrowing base.
- Do manufacturer warranty claims count as receivables?
- Often at a lower advance or not at all, because manufacturers can reject or charge back claims. A company with a strong approval history by manufacturer can make the case for including them.
- What if my parts are expensed when I buy them?
- Then the balance sheet shows no inventory to lend against. Setting up a perpetual inventory system and restating the books to carry parts as inventory is usually the first step toward an inventory advance.
- I sell new units on a floor plan. Can I still get a line from another lender?
- Yes, but the floor plan lender's lien on new units and related collateral has to be carved out, and the two lenders sign an intercreditor agreement. The line lender will also read the dealer agreement.