Meaning
Set of quality and legal standards that raw inputs must meet to be included in a company’s borrowing base. Defining raw material eligibility prevents a business from securing loans against obsolete and damaged materials. These criteria are usually negotiated between the borrower and the lender at the start of a credit agreement.
Inclusion Standard
Collateral quality is the main factor in determining the size of a revolving credit line. When raw material eligibility is assessed, the lender checks for clear title and recent purchase dates. Items that are custom-made for a single client or have a short shelf life are often excluded from the calculations.
Verification Process
Regular audits of the supply room ensure that only qualified materials are being reported. A raw material eligibility check might involve physical counting and testing of the chemical or structural properties of the stock. If the materials do not meet the agreed specifications, they are removed from the borrowing base immediately.
Default Exclusion
Protecting the lender requires the removal of any assets that cannot be easily sold to another manufacturer. Because raw material eligibility is a binary status, an item is either in or out of the pool. This clear boundary helps both parties understand exactly how much credit is available at any given time.
The cost of calling an item eligible early is the risk of a collateral shortfall if that item fails a later inspection.
