Evaluating Asset Based Borrowing Base Formulas in Growth Financing
Evaluating borrowing base availability demands stress testing collateral eligibility carve-outs against dilution and liquidation haircuts.
In Transit Inventory Sub Cap
Meaning
Lending limits applied to goods that have left a supplier but have not yet arrived at the borrower’s warehouse manage the risks associated with ocean or road transit. The in transit inventory sub cap restricts the amount of money a lender will advance against assets that are not yet under the physical control of the borrower. These goods are often subject to maritime law or international trade disputes.
Shipment Limit
Setting a specific dollar ceiling on the value of goods on the water prevents a company from overextending its credit line on speculative imports. A sub cap ensures that the majority of the collateral is sitting in a domestic facility where the lender can easily seize it. This boundary is necessary because recovering assets from a container ship is nearly impossible during a default.
Possession Boundary
Legal ownership often transfers at the port of origin (FOB shipping point) while physical possession is weeks away. The in transit inventory sub cap addresses the period where the borrower owns the risk of loss but does not have the items on hand. Lenders require proof of marine insurance and a bill of lading to even consider these items as eligible.
Logistics Risk
Extended shipping times and port strikes create volatility in the availability of funds. If the in transit inventory sub cap is reached, no further advances occur even if more goods are shipped. This constraint forces the borrower to manage its supply chain timing more carefully to avoid cash flow interruptions.