Borrowing Base Ineligibles: How to Calculate

Ineligibles are the receivables and inventory a lender will not advance against. They are subtracted from the reported collateral balance before the advance rate is applied, so they set the ceiling on what a borrower can actually draw. On accounts receivable the standard exclusions are invoices past due beyond the agreed limit, cross-aged balances, amounts above a concentration cap, contra accounts, affiliate and intercompany billings, foreign receivables without credit support, and government receivables without assignment compliance. The rule that governs the arithmetic: each invoice is removed once, no matter how many tests it fails.

Every asset-based facility runs on this calculation. The borrower reports a gross accounts receivable figure, the lender strips out the balances it could not collect in a workout, applies an advance rate to what survives, subtracts reserves, and the result is availability. Get the ineligibles wrong and the borrower either draws against collateral that is not there or sits on availability it has earned. Both are expensive, and the second one loses accounts.

What are ineligibles in a borrowing base?

Ineligibles are collateral categories excluded from the borrowing base because the lender judges them unlikely to convert to cash on the terms it needs. The exclusions are defined in the credit agreement, not by accounting rules, so two lenders can look at the same aging and produce different eligible balances. The categories below are close to universal in the US market, but the thresholds inside them are negotiated deal by deal.

• Past due invoices. Commonly anything more than 90 days from invoice date, or 60 days past the stated due date. Which of those two clocks applies matters more than most borrowers realize.
• Cross-aged balances. If a meaningful share of one customer's balance is past due, the customer's entire balance comes out.
• Concentration. The portion of any one customer's balance above a stated percentage of total eligible receivables.
• Contra accounts. Balances owed by a customer who is also a supplier, to the extent of the offsetting payable.
• Affiliate and intercompany receivables. Billings to related entities, which are not arm's length and rarely collectible in a liquidation.
• Foreign receivables without a letter of credit or credit insurance backing them.
• Government receivables. US federal balances that have not been assigned under the Assignment of Claims Act. State and municipal accounts carry their own assignment rules.
• Disputed, bill-and-hold, consignment, progress-billed and COD items, plus unapplied credits sitting on the aging.

How do you calculate ineligibles on accounts receivable?

Start with the gross receivable balance from the aging, run each exclusion test against the detail, then subtract the total. The sequence matters because several tests catch the same invoice, and the single most common error in a borrowing base is counting one invoice twice. An invoice that is both 100 days old and above the concentration cap is excluded once, not twice, and a certificate that double-counts it understates availability and quietly starves the borrower.

The practical order most lenders use is to remove the categorical exclusions first (affiliate, foreign, government, contra, disputed), then age the remainder, then apply cross-aging, and only then test concentration against the balance that is still standing. Testing concentration against the gross figure rather than the surviving figure inflates the ineligible and is worth checking on any certificate you inherit.

What is cross-aging in a borrowing base?

Cross-aging removes a customer's entire balance when a set share of what that customer owes has gone past due. The trigger is typically 25% or 50%, depending on the agreement. The logic is that a customer who has stopped paying a quarter of its invoices is not a customer with a few late items, it is a customer with a problem, and the current invoices behind it are at risk too.

This is the test that surprises borrowers most, because a single deteriorating account can pull a large current balance out of the base in one reporting cycle. It is also the test that most often reveals something a lender needs to know before the aging does.

What is a concentration limit on accounts receivable?

A concentration limit caps how much of the borrowing base any single customer can represent, commonly 15% to 20%, tightened to 10% where the customer is weak and loosened where the account is investment grade. Only the excess above the cap becomes ineligible, not the whole balance. If the cap is 20% of eligible receivables and one customer accounts for 27%, the ineligible is the seven-point excess. Factors apply the same discipline for the same reason, and the mechanics carry over almost unchanged from how factors set concentration limits.

What are contra accounts in asset-based lending?

A contra account exists where the borrower's customer is also its supplier. The customer can legally set off what it owes against what it is owed, so the lender's claim on that receivable is worth only the net. The ineligible is the lesser of the receivable and the offsetting payable. These are easy to miss, because the aging shows a clean receivable and the offset lives in the accounts payable ledger. Catching them means reconciling the two subledgers against a shared customer list, which is one of the things a field exam is there to verify.

Borrowing base ineligibles example

A distributor reports $2,000,000 in gross accounts receivable. The credit agreement sets a 90-day past-due limit, 25% cross-aging, a 20% concentration cap and an 85% advance rate on eligible receivables.

Total ineligibles come to $450,000, or 22.5% of the reported balance, which is unremarkable for a distributor with export sales and a concentrated customer list. The borrower reported $2,000,000 of collateral and can draw $1,242,500 against it. That gap between the reported number and the real one is the entire point of the exercise.

How does dilution change the advance rate?

Dilution measures the non-cash credits that reduce receivables: returns, allowances, discounts taken, warranty credits and write-offs, divided by gross sales for the period. It answers a question the aging cannot, which is whether an invoice at face value actually collects at face value. A borrower with 12% dilution is delivering 88 cents of cash for every dollar it bills.

Dilution does not usually appear as an ineligible. It shows up in the advance rate. A common convention is to reduce the advance rate roughly point for point for each point of dilution above a 5% threshold, so a borrower running 10% dilution might see 85% become 80%. Some agreements instead carry an explicit dilution reserve. Either way the measurement comes out of a field exam rather than the monthly certificate, and it is a reflection of how the borrower bills and collects. Companies that have tightened up how they chase unpaid invoices generally show lower dilution and hold a better advance rate as a result.

What are the ineligibles on inventory?

Inventory carries a longer exclusion list and a much lower advance rate, because it has to be sold before it becomes cash. Work in process is almost always ineligible, since a half-finished good has little liquidation value. So are slow-moving and obsolete items, consigned goods, inventory in transit, packaging and supplies, and anything subject to a purchase money security interest. Goods held at a third-party location generally stay ineligible until the lender holds a landlord or bailee waiver for that site.

What survives is typically advanced at 20% to 65% of cost or of net orderly liquidation value, with finished goods advancing higher than raw materials. Those ranges track the guidance in the OCC's Comptroller's Handbook on accounts receivable and inventory financing, which remains the reference most US bank examiners work from.

Are reserves the same as ineligibles?

No, and conflating them produces a wrong availability figure. Ineligibles remove collateral before the advance rate is applied. Reserves are dollar holdbacks taken after it, against risks that sit outside the collateral itself: unpaid rent in states that grant landlords a lien, accrued sales and payroll taxes, customer deposits, accrued interest, and sometimes dilution. In the example above, the $75,000 of rent and tax reserves comes off the $1,317,500, not off the $1,550,000. Applying a reserve at the wrong point in the sequence changes availability by the advance rate percentage, which on a large facility is real money.

How often are ineligibles recalculated?

Every time a borrowing base certificate is prepared, which for most facilities means monthly, and weekly or daily on revolvers where the lender wants a tighter grip. The definitions themselves get re-tested less often. A field exam, run once to four times a year depending on risk and facility size, verifies that the aging is real and resets both advance rates and ineligible definitions when the collateral picture has moved. Between exams the borrower applies the existing definitions to fresh data, which is exactly why the definitions have to be unambiguous in the agreement.

Where the work actually goes

None of these tests are conceptually hard. The cost is that they have to be applied to invoice-level detail, every cycle, against definitions that differ by facility, and the source data arrives as a PDF aging exported from whatever system the borrower runs. An analyst rekeys it, builds the exclusion columns, reconciles the total back to the general ledger, and hands over a number that a credit decision rests on. One transposed figure flows straight into availability.

That extraction and structuring step is what asset-based lending software from LenderAnalyzer removes. It reads the aging, the financial statements and the bank statements into structured, traceable data, so the ineligible tests run against clean detail instead of a retyped spreadsheet, and every figure links back to the document it came from. Borrowing base management and collateral monitoring stay with your ABL platform. We produce the verified inputs it consumes. If you are newer to the mechanics, start with what a borrowing base certificate is, or compare the two underwriting models in asset-based lending versus cash flow lending.