How Much Can I Actually Borrow Against My A/R and Inventory? A Plain-English Walkthrough

Almost every conversation we have with a CFO or business owner considering an asset-based revolver starts with the same question: how much can I actually borrow against my company's receivables and inventory? The lender websites give a number — "up to 85% of eligible AR" — but that number is deceptive. What lenders actually advance to a real business is meaningfully less than the sticker rate, because a borrowing base is built by starting with your book value and then subtracting everything that a credit officer will not lend against. If you understand how that math works before you go into a lender meeting, you will negotiate better, not overshoot on your sizing, and not be surprised at closing.

Here is the walkthrough. We will use a hypothetical middle-market distributor with $8 million in trade receivables and $6 million in inventory. Numbers below are typical ranges — every lender has its own credit box and every deal is different — but the mechanics are universal.

Start With the Two Collateral Pools

Almost every asset-based revolver is sized off the same two pools: eligible accounts receivable and eligible inventory. Some deals also include equipment or real estate in the borrowing base, but the working-capital revolver is anchored on AR and inventory. The formula, at its simplest, is:

Borrowing Base = (Advance Rate x Eligible AR) + (Advance Rate x Eligible Inventory) − Reserves

Everything that follows is about turning your book number into the "eligible" number, applying the right advance rate, and then subtracting the right reserves. Get any of those three wrong and your estimate will be off by 20-40%.

Step One: Convert Book A/R Into Eligible A/R

The lender will not advance against every dollar on your accounts receivable aging. Certain categories of receivables are excluded entirely ("ineligibles"). Common exclusions:

• Invoices over 90 days past invoice date (some lenders use 60 days, some 120). If a customer is not paying on schedule, the lender assumes they may not pay at all.
• Cross-aging. If a single customer has any invoice more than 90 days past due, all of that customer's invoices — even current ones — are often excluded. One late invoice can knock a large otherwise-current customer entirely out.
• Concentration excess. If a single customer represents more than 15-25% of your total AR, the excess above the cap is excluded. A distributor with 40% of sales to one big-box retailer will have a big concentration reserve.
• Foreign receivables (unless credit-insured or supported by a letter of credit).
• Affiliate or intercompany receivables. Zero eligibility.
• Government receivables. Some lenders require Assignment of Claims Act filings; many exclude them.
• Contra accounts. If your customer is also your vendor, the lender assumes they could offset. The offsetable amount is excluded.
• Disputed invoices, credit memos, and unresolved deductions.
• Bill-and-hold, consignment, progress-billed, and pre-billed invoices where the goods have not shipped or the service has not been fully performed.

In our example distributor, $8 million of book AR could easily shrink to $6-6.5 million of eligible AR after ineligibles. That is not a lender being unreasonable — it is what will actually be collected in a stress scenario.

Then Apply the Advance Rate

The typical eligible-AR advance rate is 80-85% for commercial receivables from creditworthy customers. Some specialty industries and lower-quality receivables run 70-75%. Government contractors may see 75-80%. Applied to our $6.25M eligible AR at 85%: $5.3 million of gross AR availability.

Then Subtract the Dilution Reserve

Dilution is the percentage of gross AR that historically gets written off — not to bad debt, but to customer allowances, returns, chargebacks, markdown deductions, and short-pays. A distributor selling into big-box retail commonly runs 3-8% dilution. A staffing firm might run 1-2%. A fashion importer 10-15%.

The lender takes the greater of your trailing-12-month dilution or a floor (typically 5%) and applies it as a dollar reserve. If dilution is 6% on $6.25M of eligible AR, that is a $375,000 reserve subtracted from availability.

Net AR availability in our example: $5.3M − $0.375M = $4.9 million.

Step Two: Convert Book Inventory Into Eligible Inventory

Inventory is where borrowers most often overestimate what a lender will advance, because the answer is not based on your cost. It is based on what a liquidator would recover in an orderly wind-down — the Net Orderly Liquidation Value, or NOLV. And an independent appraiser will tell your lender what that number is.

Common inventory ineligibles:

• Work-in-process (usually excluded entirely).
• Obsolete or slow-moving inventory (typically anything with more than 12 months of turn history sitting idle).
• Consigned goods, third-party inventory, and inventory the borrower does not own outright.
• Inventory at unauthorized third-party locations (warehouses, freight forwarders, processors) without a bailee waiver.
• Inventory subject to another lender's lien.
• Damaged, defective, seasonal, or perishable stock.
• Inventory in transit without documents-of-title and marine cargo insurance in place.

For our distributor, $6M of book inventory (at cost) might come down to $5M of eligible inventory after ineligibles.

Then Apply the NOLV Advance Rate

The advance rate on inventory is a percentage of NOLV, not a percentage of cost. If a liquidator would recover 60% of cost in an orderly liquidation, the NOLV is 60% of $5M = $3M. The advance rate against NOLV is typically 85-90%. Applied: $2.55-2.7 million of inventory availability. That is much less than 50% of book cost, which is where most first-time borrowers land in their heads.

A common shortcut: for a distributor with saleable branded finished goods, expect roughly 40-55% of book cost as the effective inventory advance. For a manufacturer with lots of WIP, expect 20-35% of book cost. For a fashion importer at the wrong point in the season, expect 15-25% of book cost.

Sublimits Matter

Most credit agreements cap inventory advances at 30-40% of the total borrowing base, or at a fixed dollar sublimit. Even if the math says more, the covenant caps it. Ask the lender for the inventory sublimit before you get excited about your inventory number.

Step Three: Add Them Up. Then Subtract Reserves.

In our example:

• Net AR availability: $4.9M
• Net inventory availability: $2.6M
• Subtotal: $7.5M

Now the lender applies credit-committee reserves on top. These are dollar deductions layered against gross availability, not against a single collateral pool. Common ones:

• Accrued liability reserves for landlord rent (if landlord waivers are not in place), state sales tax, payroll taxes, and priority claims.
• Letter of credit reserves — every dollar of standby or documentary L/C outstanding reduces availability dollar-for-dollar unless a separate sublimit is negotiated.
• Bank product reserves for treasury products, foreign exchange lines, corporate cards.
• Cash management reserves during the first month of a facility, before cash dominion is fully in place.
• Discretionary reserves — the lender's right to establish additional reserves if diligence surfaces a risk (a big customer downgrade, a bad field-exam finding, a covenant miss).

Typical reserves on a $7-8M borrowing base might total $300,000-$600,000. Say $400,000 in our example.

Estimated total borrowing base: $7.5M − $0.4M = $7.1 million against $14 million of book collateral. Roughly 50% of book value. That is a very typical outcome for a middle-market distributor.

The Rough Rules of Thumb

If you want a fast back-of-the-envelope estimate without going through every line above:

• Clean commercial-B2B distributor with diversified customer base: 45-55% of book AR + inventory.
• Distributor with heavy customer concentration or higher dilution: 35-45%.
• Manufacturer with meaningful WIP: 30-40% of AR + inventory (WIP mostly excluded).
• Staffing firm (no inventory): 70-80% of AR (high advance rate, low dilution, low concentration — the cleanest borrower profile).
• Fashion importer or heavily-seasonal business: 30-40% at peak, less at trough.
• Government contractor: 60-70% of AR, but harder to place.

If you are estimating your own capacity, start with these ranges. Then narrow by looking at your concentration profile, dilution history, and inventory mix. If the number you need is more than 20% above the top of your range, either the deal will not close, the deal will need a supplemental term loan or seller/junior tranche to fill the gap, or the collateral pool needs to be expanded (equipment, real estate).

What Increases Availability — and What Kills It

Things that increase your borrowing base:

• Diversifying customer concentration (adding new customers to spread the top-10 exposure).
• Reducing DSO so more of the AR is under 90 days.
• Cleaning up disputes and unresolved deductions before diligence.
• Improving inventory turn (reducing slow-movers).
• Getting landlord waivers signed at every operating facility.
• Negotiating higher advance rates for specific pools (a scheduled "A" customer list at 90% instead of 85%).

Things that kill availability — especially mid-facility:

• Losing a big customer (concentration recalculates against the smaller base).
• A large disputed invoice or chargeback event.
• A bad field-exam finding (the lender lowers the advance rate or imposes a new reserve).
• Extending payment terms to a struggling customer (aging drifts past 90 days).
• Building inventory ahead of a season and then missing the season.

How This Estimate Compares to What Lenders Will Tell You

When you send a deal to an ABL lender, they will produce a preliminary borrowing base estimate based on your submitted AR aging and inventory schedule. That estimate is usually within 10-15% of the final number, but it is not the final number — the field exam and the collateral appraisal will tighten it. Do not commit to a use of proceeds sized to the preliminary. Build in a cushion.

How DCE Helps

Don Clarke Enterprises is an independent advisory firm. We are not a lender, broker, or financial institution. We do not originate, underwrite, fund, approve, or close loans. Approval and funding decisions are made solely by the lender.

What we do — before you spend three months in diligence with a lender you may not close with — is estimate your realistic borrowing base honestly, help you clean up the AR and inventory picture so the eligible-collateral number is as strong as it can be, and introduce you to the lenders whose stated credit appetite matches your collateral profile and industry. We help borrowers prepare a package a credit committee will actually approve rather than a package that looks good until diligence starts.

Don Clarke is a Secured Finance Network Hall of Fame inductee, a Lifetime Achievement Award recipient, and the author of Asset Based Lending Disciplines, the first textbook ever written on asset-based lending. He has personally trained more than 5,000 lending professionals at GE Capital, JP Morgan Chase, Lloyds, and Barclays. When we tell you what your borrowing base is going to come in at, we are working from the same eligibility, advance-rate, and reserve mechanics that credit officers on the other side of your deal have been trained on.

For lenders who need due-diligence, field-exam, or portfolio-training services, our sister firm Asset Based Lending Consultants (ABLC) serves that side of the industry.

For related reading, see what to do when your bank will not renew your line of credit, how to refinance out of a merchant cash advance stack, and our advisory services.