Asset-based facilities size availability to a borrowing base rather than to cash flow, and the mechanics require ongoing operational discipline from both sides.
The borrowing base. Eligible accounts receivable at an advance rate, plus eligible inventory at a lower rate, less reserves. Availability moves daily with the collateral.
Eligibility criteria. Accounts must typically be under a stated age, from approved account debtors, not subject to offset or dispute, not from affiliates or government obligors without assignment compliance, and not concentrated above a percentage with a single debtor. Cross-aging provisions disqualify an entire debtor’s balance where a portion is past due.
Reserves. Discretionary amounts the lender may establish for dilution, rent in landlord-lien states, taxes, and other risks. The scope of that discretion is the most negotiated provision in the agreement.
Reporting. Borrowing base certificates weekly or monthly, accounts receivable ageings, inventory reports, and reconciliations to the general ledger.
Field examinations and appraisals conducted periodically at the borrower’s expense, with frequency increasing on covenant stress.
Cash dominion. Collections routed to a lockbox and applied to the facility, either continuously or on a trigger. Springing dominion preserves borrower flexibility until a defined event.
Dilution — credits, returns and discounts — directly reduces advance rates.