Determining Basic Inventory Eligibility Exclusions in Revolving Facilities
Inventory exclusions protect revolving lenders by eliminating unmarketable, encumbered, or unverified stock from the borrowing base before advance rates apply.
In-Transit Stock
Meaning
Materials or finished products that have left the seller’s facility but have not yet been received by the buyer. Accounting for in-transit stock depends on the shipping terms, which dictate whether the buyer or the seller owns the items while they are on a vessel or truck. This category represents a significant portion of working capital for companies with long global supply chains.
Ownership Transfer
Shipping terms like free on board determine the exact moment the risk of loss passes between parties. If the terms specify the shipping point, the buyer records the in-transit stock as an asset even though the goods are still moving. This accounting treatment affects the calculations for insurance coverage and inventory taxes at the end of a reporting period.
Logistical Visibility
Tracking systems provide updates on the location and estimated arrival time of the cargo. Knowing the status of in-transit stock allows production planners to schedule the start of the next manufacturing phase. Without this data, a facility might face a shutdown due to a missing component that is currently delayed at a port or border crossing.
Financial Exposure
Money tied up in moving goods is unavailable for other investments until the shipment arrives and enters the sales cycle. Long transit times increase the cost of capital and the likelihood of obsolescence.