Inventory Collateral

Valuation Methodology

Assessment of the worth of the goods is usually based on the lower of cost or market value, with additional discounts for liquidation risk. This inventory collateral provides the basis for a revolving line of credit that grows as the company stocks up for a production season. The readiness question answered is whether the company has sufficient assets to back its current debt.

An audit that measures the physical presence and condition of the stock is required to maintain the credit facility.

Liquidation Grade

Ease with which the goods can be sold to a third party influences the advance rate offered by the lender. Raw materials like steel or grain often carry a higher value than specialized finished parts because they have a broader market. This capability to convert the asset to cash is a primary concern for the financing party.

Calling the value of specialized inventory too high can lead to a shortfall if a quick sale is forced.

Control Status

Lenders often require the stock to be kept in a specific location or under the supervision of a third party custodian. This ensures that the assets are not moved or sold without the lender’s knowledge. The security interest must be perfected through a public filing to protect against claims from other creditors.