Meaning
Credit constraints prevent a receivable from being used as collateral once it exceeds a specific age. Past due ineligibility rules automatically remove old invoices from the borrowing base to protect the lender from bad debt. This exclusion applies until the payment is received or the debt is written off.
Aging Trigger
Most lenders set a limit of ninety days from the invoice date. When an invoice falls under the past due ineligibility criteria, it is no longer considered a liquid asset. This sudden change can create a liquidity gap for the borrower if they rely heavily on old debts.
Funding Restriction
Automated systems track the age of every entry in the ledger. The past due ineligibility process ensures that the credit line only fluctuates based on fresh and collectable sales. This protection is fundamental to the safety of asset based lending.
Collection Performance
High levels of excluded accounts indicate a failure in the accounts receivable department. Managing past due ineligibility requires a proactive approach to chasing payments and resolving disputes. A company that ignores these triggers will soon find its access to working capital severely limited.
Improving the speed of collection directly increases the amount of money available for production.
