Asset Based Lending Glossary

Terms and definitions used in asset based lending.

Accounts Receivable (A/R)

Accounts Receivable represent the invoiced amounts to be collected from the customers who purchased products or used services and were granted payment terms.

A/R Turnover

This ratio measures the number of days, on average, it takes to collect A/R. The formula is A/R divided by the month’s Cash Receipts times 30.

Accounts Receivable roll-forward

The roll-forward is a way to analyze Receivable activity for risk and turnover.  A/R activity is tracked monthly through the company’s General Ledger.  To the months beginning balance Invoices are added and Credit Memos and Cash Receipts are subtracted, resulting in the end of month A/R Balance.  The A/R activity is frequently reported on the Borrowing Base Certificate and is reviewed in Field Examinations.

Advance Rate

The Advance Rate is the percentage of a company’s assets (typically A/R and Inventory) a Lender will use to determine the Borrowing Base.  Receivable advance rates typically range from 70% to 80% and are applied to eligible accounts.  Inventory advance rates typically range from 20% to 80%, depending on marketability.

Borrowing Base

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.

Sales Dilution

Sales dilution is the sum of non-cash credits posted to A/R divided by gross invoicing (i.e. Gross Sales).  Dilution is composed of bad debt write-offs, product/warranty returns, fast pay/volume discounts, advertising/co-op credits, and invoicing errors.  Dilution is expressed as a percentage. Dilution is used by Lenders as a key component in establishing the A/R Advance Rate.

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