Meaning
Financing agreements define the specific conditions that trade invoices must satisfy to be accepted as collateral for a credit facility. Establishing receivables eligibility protects lenders by ensuring that only high-quality, unpaid invoices secure the borrowed funds. This standard is detailed in the credit and security agreement.
Selection Criteria
Lenders analyze the age, credit status, and documentation of each invoice before including it in the borrowing base. When an invoice meets the criteria, it is assigned to the lender as security for the loan. This process ensures that the collateral consists of liquid assets that are likely to be collected in cash.
Portfolio Exclusion
Invoices that are past due, disputed, or issued to affiliated companies are excluded from the borrowing base. When a customer fails to pay within ninety days, the invoice is categorized as ineligible and removed from the collateral list. This mechanism protects the lender from the risk of bad debt and dilution.
Verification Standard
Audit teams perform regular tests to verify that the eligible invoices represent actual shipments of goods to creditworthy buyers. When the audit occurs, the lender cross-references the invoices with shipping documents and customer purchase orders. This check ensures that the borrowing base is backed by genuine commercial transactions and prevents the borrower from inflating their credit capacity with inaccurate billing data.
