Advance rate

The advance rate is the fraction of the value of the assets given as security that the lender makes available to the borrower. It applies to trade receivables, inventory, equipment or real estate in an asset-based financing. Combined with the eligibility criteria and the reserves, it forms the borrowing base. In factoring, it corresponds to the prepayment percentage agreed in advance on approved receivables. In the North American asset-based lending market, the advance rate lies between 70% and 90% for trade receivables, between 50% and 70% for inventory and between 60% and 80% for real estate. The lender sets the rate according to the liquidity of the asset, the quality of the debtors, historical dilution, the borrower’s risk and industry practice. High or unstable dilution leads the lender to lower the rate or to set up a dedicated reserve. A contractual grid reduces the rate by one point for each point of dilution above a threshold. The rate determines the drawing capacity of the facility: on €100m of eligible receivables, each point of rate represents €1m of financing.

A trading company holds €80m of trade receivables, of which €70m are eligible, and €60m of eligible inventory. With an advance rate of 85% on receivables and 60% on inventory, the base reaches €59.5m plus €36m, or €95.5m. If dilution exceeds the contractual threshold by two points and the rate on receivables falls to 83%, the base drops by €1.4m.

• Negotiate the rate for each asset category and the criteria that make it vary over the life of the facility.
• Check the value to which the rate applies for inventory: cost, market value or liquidation value.
• Have the adjustment of the rate for dilution capped.
• Ask for an initial audit of the assets so that the rate is set on measured data.