What are AR Lines of Credit?
Asset-based lenders (ABL) will lend against AR on a stand-alone basis or as part of a collateral base including several kinds of collateral. The advance rate on AR will typically vary from 75%-90% of “eligible” AR.
Portions of AR that are excluded from borrowing are referred to as “ineligible”. Common categories of ineligible AR (which reduces the available funds to borrow) include:
Progress Billings: Partial billings on long-term contracts are usually excluded. This payment structure is very common in construction-related contracts and require specialty AR lenders
Aged Receivables: Accounts that are past due beyond a certain threshold, often 90 days from the invoice date, are typically deemed ineligible
Cross-Aged Accounts: If a significant portion of a customer's account (often 25-33%) is past due, the entire account may be considered ineligible, not just the overdue portion
Concentration Issues: Receivables from a single customer that exceed a certain percentage of total AR may be partially ineligible to reduce concentration risk
Related-Party Receivables: Accounts due from affiliates, subsidiaries, or other related entities are often excluded
Foreign Receivables: Accounts from customers located outside the borrower's home country may be ineligible due to increased collection risks; Some lenders will allow foreign receivables so long as the borrower obtains credit insurance to cover those foreign receivables
Disputed Receivables: Accounts that are subject to disputes, whether due to quality issues, pricing disagreements, or other conflicts, are typically ineligible
Unbilled Receivables: Accounts for goods or services delivered but not yet invoiced are often excluded
Lack of First Priority Security Interest: Receivables for which the lender does not have a first priority security interest are often ineligible
Bonded Receivables: These are typically subject to a first priority lien in favor of the surety and are usually considered ineligible
Contra Accounts: Receivables where the borrower is both a creditor and debtor to the same entity, creating a setoff risk
Bankrupt or Insolvent Customers: Receivables from customers who have filed for bankruptcy or are known to be insolvent
Government Receivables: Some lenders may exclude government accounts due to specific regulations or assignment restrictions