Glossary
Advance Rate
An advance rate is the maximum percentage of a collateral asset's value that a lender will lend against. Asset-based lenders apply advance rates to eligible receivables, inventory, equipment or other assets to calculate a borrowing base, which caps the amount a borrower can draw on a revolving credit facility at any time.
Formula
Example
A company has $5,000,000 of receivables, of which $4,000,000 are eligible after excluding past-due and concentrated accounts. At an 85% advance rate, receivables support $3,400,000. Eligible inventory of $3,000,000 at a 50% advance rate supports $1,500,000. The borrowing base is $4,900,000. With $4,500,000 already drawn, remaining availability is $400,000. The lender recalculates this figure every reporting period.
How it is used in underwriting
Advance rates are how asset-based lenders turn collateral into a loan limit. The rate reflects how much the collateral would realistically produce in a liquidation, after costs and dilution, with a cushion for the lender. Receivables, which convert to cash quickly, get higher rates than inventory, which must be sold. Underwriters set rates after field exams and appraisals, considering dilution from returns and credits, customer concentration and credit quality, and inventory liquidation values. Eligibility criteria, such as excluding invoices more than 90 days past due, matter as much as the rate itself.
Advance rates appear well beyond traditional asset-based lending. Warehouse lenders apply them to pools of consumer, small business or mortgage loans; specialty finance lenders apply them to royalty streams, litigation claims or equipment leases. In each case, the rate reflects expected losses, volatility and liquidity. A common mistake is focusing on the headline rate while ignoring reserves, concentration limits and eligibility exclusions that shrink actual availability. Borrowers should model availability under stress, since borrowing bases shrink exactly when sales drop and liquidity is most needed. Lenders should test that advance rates hold up under stressed default and recovery assumptions.
Typical benchmarks
Asset-based lenders commonly advance around 80% to 90% against eligible receivables and lower rates against inventory, often tied to a percentage of net orderly liquidation value. Rates for loan pools and royalties vary widely with collateral performance.
Frequently asked questions
What is a borrowing base?
A borrowing base is the maximum amount a borrower can draw on an asset-based credit facility, calculated by applying advance rates to eligible collateral and subtracting any reserves. It is updated regularly, often weekly or monthly, through a borrowing base certificate that the borrower submits to the lender.
Why are advance rates lower for inventory than receivables?
Receivables are claims on customers that convert to cash relatively quickly and predictably. Inventory must be sold, often at a discount in a liquidation, and may be obsolete, perishable or hard to move. Lenders use lower advance rates on inventory to reflect its lower and less certain recovery value.
What makes collateral ineligible?
Common exclusions include receivables past due beyond a set period, invoices to affiliates or foreign customers, amounts subject to offset or dispute, and concentrations above set limits. For inventory, exclusions often include work in process, consigned goods, slow-moving or obsolete items and goods held at third-party locations without access agreements.
Related terms
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