How is availability calculated on an asset-based line of credit?

Here is the calculation with numbers attached.

A worked example

Illustrative only — every figure below is invented to demonstrate the mechanics. Advance rates and reserve levels are negotiated deal by deal and none of these should be read as typical.

So a facility with a 2,000,000 commitment and 1,620,000 of gross collateral can draw 156,000 today.

What one slow customer does to the same facility

Carry those numbers forward. Of the 820,000 of eligible receivables, 260,000 is owed by a single customer. That customer hits a difficult quarter and 80,600 of its balance — 31% — crosses the ageing cut-off.

Most agreements contain a cross-ageing provision: once more than a stated share of one customer's balance is past due, the entire balance for that customer becomes ineligible. At a 25% threshold, all 260,000 comes out.

Eligible receivables fall to 560,000. At the same 80% advance rate that is 448,000, plus 200,000 of inventory, less 75,000 of reserves, less the 625,000 of outstandings and letters of credit. Availability is negative 52,000.

Nothing was written off. No sale was lost. 80,600 of late invoices removed 208,000 of availability and left you 52,000 over-advanced, which in most credit agreements is an immediate repayment obligation and in some is an event of default.

The ratio worth knowing for your own facility is availability lost divided by the late amount that caused it. Here it is 2.6 to 1. Work yours out from your two largest customers and the cross-ageing threshold in your own agreement, in advance rather than during.

What moves the number fastest

How to check the lender's number

Rebuild the certificate yourself from your aging every month, and reconcile any difference before you need the money. The two most common causes of a surprise are an aging report that does not tie to the general ledger, and unapplied cash sitting on account. Both are fixable, and both are read by a lender as a control problem rather than an accounting one.

Rebuilding the certificate yourself, in order

The two causes named above are the first two steps of a five-step routine. Run it monthly from your own ageing, before you submit rather than after the lender queries it.

1. Tie the ageing total to the general ledger receivables balance. If those two do not agree, nothing downstream is reliable. This is the single most common break.
2. Apply unapplied cash. Payments sitting on account rather than against specific invoices inflate the ageing, then get stripped out by the lender, and the difference looks like a discrepancy you created.
3. Run the exclusions in the order the agreement lists them, and do not double-count. An invoice that is both past the cut-off and above the concentration limit comes out once.
4. Apply the advance rate to what survives, then test each sublimit separately rather than against the total.
5. Subtract reserves at their current amounts, not last month's.

Keep the workings. A certificate you can explain line by line is worth considerably more in a difficult month than one that happened to be right.

What to negotiate, and when

Availability is produced by definitions, and definitions are negotiated once — at closing. After that you are asking for an amendment, which is a different conversation with a different answer.

Worth asking for: the ageing cut-off measured from due date rather than invoice date, where your terms are genuinely long. A stated cross-ageing threshold rather than a discretionary one, with a carve-out for a named customer whose payment habits are slow but reliable. Concentration limits set per customer rather than one blanket percentage, so your best account is not penalised for being your best account. Notice and a stated basis before a new reserve appears. And a defined treatment of availability around a field exam, because that is when reserves most often arrive.

The honest expectation is that you will get some of this and not all of it, and which parts depend on facility size. Asking costs nothing, and how a lender answers tells you how it intends to run the relationship when something goes wrong.