Meaning
Financing structures based on the liquidation value of company assets provide immediate liquidity to capital-intensive businesses. An asset based credit facility allows a borrower to secure funds against accounts receivable, inventory, and equipment rather than relying solely on cash flow history. This arrangement defines the borrowing base through periodic audits of collateral quality and aging.
Collateral Liquidity
The borrowing base represents the maximum available credit at any specific time. Calculations for an asset based credit facility typically apply a percentage discount to the face value of receivables to account for potential bad debt or dilution.
Borrowing Formula
Regular field examinations ensure that the physical inventory and ledger entries match the reported collateral values. Lenders for an asset based credit facility monitor the turnover rate of stock to verify that the collateral remains liquid and marketable. High inventory obsolescence or slow payment cycles from customers reduce the available credit.
This process of continuous monitoring prevents the accumulation of non-performing assets within the secured pool. Calling the facility early occurs when the value of the underlying assets falls below the outstanding loan balance, creating a deficiency that the borrower must rectify immediately.
Examination Frequency
Audits generally occur quarterly to assess the health of the underlying ledger. An asset based credit facility requires precise reporting to maintain access to capital.
