Meaning
Collateral restrictions within asset-based lending facilities cap the inclusion of partially completed inventory within eligible collateral calculations. A work in process cap sets a maximum dollar amount or percentage limit on unfinished goods, reflecting the low recovery value of incomplete manufactured items during liquidation scenarios. Lenders enforce this eligibility boundary because transforming partially finished inventory into saleable products requires significant additional capital, labor and raw materials.
Incomplete inventory exceeding the cap is classified as ineligible collateral, protecting lenders against unrecoverable manufacturing costs.
Valuation Restraint
Work in process collateral presents unique recovery risks because liquidators rarely complete unfinished manufacturing runs following borrower default. Imposing a work in process cap ensures that revolving credit availability remains anchored to finished goods and raw materials with established market liquidity. Borrowing base certificates automatically cap work in process inventory at predefined limits, typically capped at twenty percent of total inventory collateral.
Unfinished goods above the cap are removed from borrowing capacity formulas.
Liquidation Risk
Liquidating incomplete inventory yields minimal cash recovery because buyers incur significant finishing costs. Excluding excess work in process protects lenders from funding non-saleable industrial assets.
Borrowing Adjustment
Manufacturing expansion drives work in process inventory growth, requiring careful cash flow management under capped borrowing formulas. Operational planning must account for collateral exclusions when scaling production lines. A work in process cap limits credit facility exposure to partially manufactured inventory assets.
