Standard Asset Based Lending Ineligible Accounts

There are numerous accounts that an asset-based Lender may consider undesirable for inclusion in the borrowing base collateral.  Listed below are A/R ineligibles most commonly found for an asset-based borrower:

Ineligible Accounts Receivable (this list is not deemed all inclusive)

Accounts Over 90 Days (3x terms):  In most cases, asset based lending general guidelines state that ineligible accounts receivable are those accounts 90 days past the invoice date.  This could vary if the borrower’s standard terms of sale are extremely long or short.  This ineligible category takes precedence over other ineligibles when calculating the borrowing base.

Credits in Prior:  A way of describing the amount of credit (negative) balances on an A/R aging that are aged over 90 days.   These negative balances artificially increase the total borrowing base.  When preparing a borrowing base certificate, credits in prior must be deducted if the over 90 amount of the A/R aging is taken as a total.

Contra Accounts:  Accounts listed as A/R and A/P may give rise to offset.  The lower of the two totals should be considered ineligible.

Concentration Limits: Accounts on an individual or consolidated basis who’s total is in excess of a specified percentage (typically 20%) or dollar limit.  Concentration limits will reduce concentration risk in A/R.  Lenders will sometimes increase or waive limits based on the borrower’s individual customers’ risk rating.

Cross-aged Accounts (10% rule):  This amount is deducted when a borrower has a customer with balances over 90 days, and also balances under 90 days.  The rule states that when a customer has more than 10%  of their total balance aged over 90 days, the remaining balance is also included as ineligible.  While 10% is the most common cross-age percentage,  Lenders will sometimes increase the amount to 15%, 20% or 25%.  The idea behind this ineligible category is that if a customer has not paid their outstanding over 90 days, it is highly unlikely they will pay the current portion.

Affiliates (intercompany and employee) Accounts:  A/R issued to related company accounts or employees of the company.

Federal Government Accounts:  Eligibility of Federal government receivables is a problem because the Lender’s security interest is not recognized by the government unless the Lender takes an assignment of claims. Contracts over $1,000 can be assigned (perfected) to a commercial finance lending institution if the provisions of the “Assignment of Claims Act of 1940” is completed with the proper paperwork filed.

Foreign Accounts: Foreign accounts are usually considered ineligible because they are difficult to collect in the event of a default.  Canadian accounts are not typically considered ineligible, unless the address of the debtor is in the province of Quebec.  Lenders will sometimes lend on foreign A/R if the borrower secures insurance through the Import/Export Bank

Retention (Contractors):  Retention is the percentage of payments for the Contracts in Progress that are held back to to ensure adequate performance.  Retention is considered ineligible due to the length of time to collect due to negotiations with the General Contractor/Job Owner as to the successful completion of the project.

 

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