Resource Center: ABL Borrowing Base Ineligibles

ABL Borrowing Base Ineligibles: Accounts Receivable (AR), Inventory and Reserves

In Asset-Based Lending (ABL), borrowing base ineligibles refer to specific portions of Accounts Receivable and Inventory that do not qualify as part of the base for the lender to advance funds on. The ineligble categories are commonly referred to as Accounts Receivable Ineligibles, Inventory Ineligibles, and Reserves which collectively are specific items or categories of assets or a percentage of the availability that a lender withholds from the total available credit facility. A/R and Inventory ineligible amounts are typically excluded from the borrowing base because they are deemed to carry higher risk, be uncollectible, or lack sufficient liquidation value. Reserves are used to mitigate risk and ensure the lender has a buffer against potential losses.

Impact on Borrowing Base:

Lenders determine a borrowing base by applying advance rates to the eligible portions of AR and Inventory. The removal of ineligibles and the application of a reserve reduces the borrowing capacity, which can impact liquidity and available working capital. A high percentage of ineligibles may indicate financial stress, inventory inefficiencies, or collection challenges, potentially leading to covenant breaches or reduced financing availability. Effective management of AR and Inventory ineligibles is critical to maximizing borrowing base availability and ensuring compliance with lender requirements.