Asset Based Lending Calculations and Metrics

These commonly used calculations and metrics are used to evaluate the performance of asset based lines of credit.

Accounts Receivable Turnover

(Accounts Receivable / Cash Receipts) x 30 days = Turnover days

A/R turnover shows the average number of days it takes the company to collect their A/R accounts over the period reviewed.  Typically calculated over a 12 month time period to avoid seasonal issues skewing the data.

Sales Dilution

(Non-cash credits / Total Gross Sales) x 100 = %

Dilution is when A/R is credited for any reason other than cash collection of an outstanding balance.  Non-cash credits include credit memos, bad debt write offs, fast pay discounts and returns.  The dilution calculation shows the percentage of billings that are actually historically collected.  Dilution percentage is the primary factor in determining the loan’s advance rate.

Borrowing Base Turnover

(Borrowing Base / Cash Receipts) x 30 days = Turnover days

Borrowing base turnover measures the average number of days the company takes to collect the combined value of the A/R borrowing base and the inventory borrowing base.

Loan Turnover

(Loan Balance / Cash Receipts) x 30 days = Turnover days

Loan turnover shows the average number of days it takes to payout the loan balance based on cash collections over the period reviewed.  This metric gives an indication of the lender’s exposure in number of days.

Inventory Turnover

(Inventory / Cost of Goods Sold ) x 30 days = Turnover days

Inventory turnover is a measure of the average days inventory is held prior to being sold. This metric is an indicator of the efficiency of a company’s operations.

Inventory Reliance

(Loan Balance – A/R borrowing Base) / Loan Balance

Inventory reliance measures the loan’s reliance on inventory collateral as calculated under the current approved borrowing plan. The higher the reliance on inventory as a percentage of the loan, the greater the risk to lender.  This is because it will take about 30 days in a normal sales cycle to convert A/R into cash and pay down the loan balance.

Effective Inventory Advance

(Loan Balance – A/R borrowing Base) / Gross Inventory

Effective inventory advance measures the portion of inventory as a percentage that supports the current outstanding line balance.

 

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