Meaning
Eligibility rules for asset-based credit facilities specify that only assets physically located within the lender’s jurisdiction are eligible for financing. An in-transit inventory exclusion removes goods that are currently in transit, whether by sea, rail, or road, from the calculated borrowing base. This restriction protects the lender from the risks of loss, seizure, or legal disputes while goods are in transit, thereby maintaining a highly secure collateral pool.
Credit Protection
Secured lenders enforce this boundary to ensure that they can easily take possession of the collateral if the borrower defaults. The in-transit inventory exclusion avoids the complications of maritime law and cross-border transport regulations. This safety measure ensures that the collateral is always accessible.
Risk Allocation
Supply chain risks are borne by the borrower rather than the financing institution. By applying the in-transit inventory exclusion, the lender prevents the monetization of assets that are not yet secured or verified. This policy reduces the probability of loss.
Valuation Accuracy
Collateral valuation relies on physical audits that cannot be performed on goods on the move. This exclusion maintains the integrity of the valuation by limiting the borrowing pool to verified, stationary assets. This discipline supports the security of the loan.
