Borrowing Base and Asset-Based Revolvers
5 minutes
5 Questions
In the CTP body of knowledge, asset-based revolvers and borrowing bases fall under Capital Structure and Long-Term Capital as a key form of secured financing, particularly for firms with substantial working capital assets but limited unsecured borrowing capacity. An asset-based revolver (asset-based lending, or ABL) is a revolving credit facility secured by specific, liquid collateral—most commonly accounts receivable and inventory, and sometimes equipment or real estate. Unlike cash-flow lending, where the lender focuses on EBITDA and leverage ratios, ABL lenders underwrite primarily to the liquidation value of the pledged assets. This makes ABL attractive to companies with cyclical earnings, high leverage, rapid growth, or turnaround situations. The borrowing base defines the maximum amount the borrower can draw at any time. It is calculated by applying advance rates to eligible collateral. Typical advance rates are 75–90% of eligible receivables and 40–65% of eligible inventory (often based on net orderly liquidation value). Ineligible assets—such as receivables over 90 days past due, intercompany or foreign receivables, concentrated accounts exceeding a set percentage, obsolete or work-in-process inventory—are excluded. The borrower submits a borrowing base certificate (weekly or monthly) detailing collateral balances, and availability equals the lesser of the borrowing base or the facility commitment, minus outstanding loans and letters of credit. Key features include: lockbox or dominion-of-funds arrangements where collections pay down the loan; field examinations and inventory appraisals; springing covenants (e.g., fixed-charge coverage) triggered only when availability falls below a threshold; and pricing typically at SOFR plus a spread, with unused fees. For the treasury professional, ABL offers flexible liquidity that expands with sales growth and fewer financial covenants, but requires intensive reporting, collateral monitoring, and management of availability fluctuations. It is a critical bridge between short-term working capital financing and the firm's broader long-term capital structure decisions.
Borrowing Base and Asset-Based Revolvers: A Complete CTP Study Guide
Why This Topic Matters
For a treasury professional, the ability to keep a company liquid is the single most important job. Asset-based revolving credit facilities (often called ABL revolvers) are one of the most common ways mid-sized and leveraged companies fund working capital, and the borrowing base is the mechanism that determines exactly how much they can draw on any given day. If you misunderstand how the borrowing base is calculated, you can overestimate available liquidity, miss payroll or supplier payments, trip a covenant, or report inaccurate availability to management and lenders.
On the AFP CTP exam, this topic sits within Capital Structure and Long-Term Capital (and overlaps with short-term financing and working capital management). You can expect questions that ask you to (1) define asset-based lending and distinguish it from cash-flow lending, (2) calculate availability from a borrowing base, (3) identify what makes collateral eligible or ineligible, (4) explain advance rates, reserves, and the borrowing base certificate, and (5) describe lender controls such as cash dominion and field exams. Because the calculations are formulaic, these are high-value questions where disciplined candidates can earn easy points.
What Is an Asset-Based Revolver?
An asset-based revolver is a committed revolving line of credit in which the lender's willingness to advance funds is tied directly to the liquidation value of specific current assets pledged as collateral, most commonly accounts receivable and inventory, and sometimes machinery, equipment, or real estate. The borrower can draw, repay, and redraw repeatedly during the commitment period (frequently three to five years), which is why multi-year ABL facilities appear in the capital structure discussion even though they fund short-term needs.
Contrast this with a cash-flow revolver, where the lender looks primarily at projected EBITDA and leverage ratios and controls risk through financial covenants (leverage, interest coverage, fixed charge coverage). Asset-based lenders look first at collateral and control risk through collateral monitoring and a limited covenant package. ABL is therefore well suited to companies that are asset-rich but have volatile, seasonal, or thin earnings: distributors, wholesalers, retailers, manufacturers, and companies in turnaround.
Key Vocabulary You Must Know
Borrowing base: The maximum amount the borrower is permitted to have outstanding, computed by applying advance rates to eligible collateral and subtracting reserves. Outstanding loans may never exceed the lesser of the borrowing base and the facility commitment.
Advance rate: The percentage of eligible collateral value the lender will lend against. Typical ranges: 80 to 90 percent of eligible receivables; 50 to 65 percent of eligible inventory at cost (or often 85 percent of net orderly liquidation value, NOLV); lower rates for work-in-process or specialized equipment. Higher quality, more liquid collateral receives higher advance rates.
Eligible collateral: Assets that meet the credit agreement's criteria. Common receivable eligibility rules exclude accounts over 90 days past invoice (or 60 days past due), the full balance of any customer with more than 50 percent of its receivables past due (the cross-aging rule), concentrations above a stated percentage of total receivables, foreign accounts without insurance or letters of credit, affiliate or intercompany accounts, government accounts not assigned under the Assignment of Claims Act, contra accounts (where the customer is also a supplier), bill-and-hold, consignment, and disputed accounts. Inventory eligibility typically excludes work-in-process, slow-moving or obsolete goods, goods in transit, consigned goods, and inventory at locations without landlord waivers.
Ineligibles: Collateral that fails the eligibility tests and is deducted before advance rates are applied.
Reserves: Lender-determined deductions from the borrowing base for specific risks: dilution reserves (credit memos, returns, discounts), rent reserves for leased warehouses, outstanding letters of credit, accrued payroll or tax liens, and seasonal or inventory shrink reserves.
Dilution: The percentage of receivables that is settled in something other than cash (returns, allowances, write-offs). Lenders measure dilution and often set the receivable advance rate at roughly 100 percent less dilution less a cushion.
Availability (excess availability): Borrowing base minus loans outstanding minus letters of credit issued. This is the practical liquidity number treasury tracks every day.
Borrowing base certificate (BBC): A report, signed by an authorized officer, submitted weekly or monthly (daily for highly leveraged borrowers) that lists collateral balances, ineligibles, advance rates, reserves, and resulting availability. Misstating a BBC is typically an event of default.
Field examination (collateral audit): Periodic on-site review by the lender or its agent testing receivable aging, inventory counts, dilution, and the accuracy of BBCs. Inventory often also requires an independent appraisal to set NOLV.
Cash dominion: The lender's control over collections. Under full dominion, customer payments go to a lender-controlled lockbox or blocked account and are swept daily to pay down the revolver; the borrower then re-borrows for disbursements. Under springing dominion, the lender takes control only if availability falls below a threshold or a default occurs. Dominion is the main reason ABL lenders can accept weaker credit profiles.
Springing covenant: Many ABL agreements have only one financial covenant, a minimum fixed charge coverage ratio (often 1.0x or 1.1x), tested only when excess availability drops below a trigger such as 10 to 12.5 percent of the commitment.
How the Borrowing Base Works: Step by Step
Step 1: Start with gross collateral balances from the aging report and perpetual inventory records.
Step 2: Subtract ineligibles to arrive at eligible collateral.
Step 3: Multiply each eligible category by its advance rate.
Step 4: Apply any sub-limits (for example, inventory availability may not exceed a fixed dollar cap or a percentage of total availability).
Step 5: Subtract reserves.
Step 6: The result is the borrowing base. Compare it to the facility commitment; the lesser of the two is the maximum permitted outstanding.
Step 7: Subtract loans outstanding and letters of credit to find excess availability.
Worked Example
Facility commitment: $25,000,000.
Gross accounts receivable: $18,000,000. Ineligibles: $3,000,000 (over 90 days, concentration excess, foreign). Eligible receivables: $15,000,000. Advance rate 85 percent: $12,750,000.
Gross inventory at cost: $14,000,000. Ineligibles: $4,000,000 (WIP, in-transit, obsolete). Eligible inventory: $10,000,000. Advance rate 50 percent: $5,000,000. Inventory sub-limit $6,000,000, so $5,000,000 stands.
Reserves: rent reserve $400,000 and dilution reserve $350,000, total $750,000.
Borrowing base: $12,750,000 + $5,000,000 - $750,000 = $17,000,000.
Lesser of borrowing base and commitment: $17,000,000 (the commitment of $25,000,000 is not the binding constraint).
Loans outstanding $11,000,000; letters of credit $1,500,000.
Excess availability: $17,000,000 - $11,000,000 - $1,500,000 = $4,500,000.
Interpretation: Even though the bank committed $25 million, the company can borrow only $4.5 million more today. If a large customer pays late and $2 million of receivables age past 90 days, eligible receivables drop and the borrowing base falls by $1.7 million (85 percent of $2 million). If outstandings exceed the new borrowing base, an overadvance exists and must be repaid immediately. This illustrates why treasury forecasts the borrowing base, not just the commitment.
Pricing and Costs
ABL revolvers are priced as a floating spread over a reference rate such as SOFR or the prime rate, with the spread often stepping down as excess availability increases (a pricing grid). Additional costs include an unused (commitment) fee on the undrawn portion, letter of credit fees, collateral monitoring or administration fees, field exam and appraisal costs, and upfront arrangement fees. Because the lender is better protected by collateral and dominion, the interest spread is often lower than an unsecured line would be for the same borrower, but the all-in cost including monitoring fees and administrative burden should be compared. Compute the effective annual cost by adding interest on average outstanding, unused fees on the average undrawn amount, and fixed fees, then dividing by average usable funds.
Advantages and Disadvantages
Advantages: availability grows with sales and inventory (self-liquidating alignment with the operating cycle); fewer and looser financial covenants; accessible to borrowers with weak or volatile earnings; multi-year committed funding; often lower spread than unsecured alternatives for leveraged credits.
Disadvantages: heavy reporting and administrative burden; lender discretion over eligibility and reserves can shrink availability unexpectedly; cash dominion reduces operating flexibility; availability shrinks in a downturn exactly when the company needs cash; collateral is encumbered, limiting other financing; monitoring fees and audits add cost.
Related Comparisons the Exam Likes
ABL revolver versus factoring: In factoring the receivables are sold (often without recourse) and the factor assumes collection and credit risk; in ABL the receivables remain on the balance sheet as collateral and the borrower keeps credit risk. ABL revolver versus receivables securitization: securitization sells receivables to a bankruptcy-remote special purpose entity that issues commercial paper or notes; it is typically larger scale and off-balance-sheet oriented. ABL revolver versus cash-flow revolver: collateral-driven availability and dominion versus EBITDA-driven covenants. ABL revolver versus commercial paper: CP is unsecured short-term paper available only to high-grade issuers, usually backed by a committed revolver as liquidity support.
Treasury's Role
Treasury prepares and certifies the borrowing base certificate, forecasts availability alongside the cash forecast, manages the lockbox and sweep arrangements under dominion, monitors covenant triggers, coordinates field exams, negotiates eligibility definitions and advance rates at origination (these negotiations matter as much as the interest spread), and decides daily draw and repayment amounts to minimize interest while maintaining a liquidity cushion.
Exam Tips: Answering Questions on Borrowing Base and Asset-Based Revolvers
1. Apply the formula in the correct order. Gross collateral minus ineligibles equals eligible collateral; eligible collateral times advance rate equals gross availability; subtract reserves to get the borrowing base; then take the lesser of the borrowing base and the commitment; then subtract outstandings and letters of credit for excess availability. The most common trap is applying the advance rate to gross rather than eligible collateral.
2. Never forget the "lesser of" rule. If a question gives both a commitment and a borrowing base, the maximum borrowing is the smaller number. Distractor answers will show the commitment when the borrowing base is smaller, or vice versa.
3. Watch for letters of credit. Outstanding letters of credit consume availability even though no cash has been advanced. Subtract them.
4. Know the typical advance rates and why they differ. Receivables (80 to 90 percent) are more liquid and self-converting than inventory (50 to 65 percent of cost); finished goods beat raw materials, and work-in-process is usually ineligible. If a question asks which collateral earns the highest advance rate, choose receivables; if it asks which is usually ineligible, choose WIP or intercompany receivables.
5. Memorize the classic ineligibles. Over 90 days, cross-aged accounts, concentration excess, foreign, affiliate, contra, government without assignment, disputed, consignment, in-transit. Exam items often describe a receivable and ask whether it qualifies.
6. Recognize ABL by its signals. Words like collateral monitoring, borrowing base certificate, field exam, lockbox dominion, advance rate, and springing fixed charge covenant all point to asset-based lending. Words like leverage ratio, EBITDA, and unsecured point to cash-flow lending.
7. Understand who ABL is for. If a scenario describes a company with strong working capital assets but weak, seasonal, or volatile earnings, or a company that cannot meet cash-flow covenants, asset-based lending is the likely best answer.
8. Distinguish ABL from factoring and securitization. ABL keeps receivables on the books and retains credit risk; factoring sells them, often transferring credit risk; securitization uses a special purpose entity. Questions on "which option removes receivables from the balance sheet" are not asking about ABL.
9. Think about direction of change. If sales fall or receivables age, the borrowing base shrinks; if the lender raises reserves or lowers advance rates, availability shrinks; if the company collects faster or inventory becomes more liquid, availability grows. Be ready to explain why ABL availability is procyclical and why treasury maintains a cushion above the springing covenant trigger.
10. Read units carefully. Inventory may be given at cost or at NOLV with different advance rates; percentages may be quoted of commitment or of borrowing base for covenant triggers. Highlight the base to which each percentage applies.
11. In cost questions, include all fees. Effective cost equals interest plus unused fees plus monitoring and arrangement fees, divided by usable proceeds. A facility with a lower spread but heavy fees may be more expensive.
12. Remember treasury's responsibilities. Questions may ask what the treasurer must do under an ABL agreement: submit accurate borrowing base certificates, maintain lockbox and sweep arrangements, cooperate with field exams, and monitor excess availability against covenant triggers.
Sample Question 1
A company has a $20 million ABL revolver. Eligible receivables are $12 million (advance rate 85 percent), eligible inventory is $8 million (advance rate 50 percent), reserves are $500,000, loans outstanding are $9 million, and letters of credit total $1 million. What is excess availability?
Solution: Receivable availability $10.2 million plus inventory availability $4.0 million minus reserves $0.5 million equals borrowing base $13.7 million. Lesser of $13.7 million and $20 million is $13.7 million. Subtract $9 million loans and $1 million letters of credit: excess availability is $3.7 million.
Sample Question 2
Which receivable would most likely be classified as ineligible in a borrowing base? (a) A $50,000 invoice from a domestic customer, 45 days old. (b) A $50,000 invoice from a foreign customer with no credit insurance. (c) A $50,000 invoice from a customer representing 8 percent of total receivables. (d) A $50,000 invoice from a long-standing customer, 30 days old.
Answer: (b). Uninsured foreign receivables are standard ineligibles; the others meet typical aging and concentration tests.
Sample Question 3
A manufacturer with highly seasonal earnings and large inventories has been unable to satisfy the leverage covenants in its unsecured cash-flow revolver. Which financing alternative best fits its profile?
Answer: An asset-based revolver, because availability is tied to collateral rather than earnings and covenants are minimal, typically a springing fixed charge coverage test.
Final Review Checklist
Can you define borrowing base, advance rate, eligible collateral, reserves, dilution, excess availability, borrowing base certificate, field exam, and cash dominion? Can you compute availability in the correct order, including the lesser-of rule and letters of credit? Can you explain why receivables receive higher advance rates than inventory? Can you list at least six common ineligibles? Can you distinguish ABL from cash-flow lending, factoring, and securitization? Can you describe treasury's daily responsibilities under an ABL agreement? If yes to all, you are ready for this topic on the CTP exam.
For a treasury professional, the ability to keep a company liquid is the single most important job. Asset-based revolving credit facilities (often called ABL revolvers) are one of the most common ways mid-sized and leveraged companies fund working capital, and the borrowing base is the mechanism that determines exactly how much they can draw on any given day. If you misunderstand how the borrowing base is calculated, you can overestimate available liquidity, miss payroll or supplier payments, trip a covenant, or report inaccurate availability to management and lenders.
On the AFP CTP exam, this topic sits within Capital Structure and Long-Term Capital (and overlaps with short-term financing and working capital management). You can expect questions that ask you to (1) define asset-based lending and distinguish it from cash-flow lending, (2) calculate availability from a borrowing base, (3) identify what makes collateral eligible or ineligible, (4) explain advance rates, reserves, and the borrowing base certificate, and (5) describe lender controls such as cash dominion and field exams. Because the calculations are formulaic, these are high-value questions where disciplined candidates can earn easy points.
What Is an Asset-Based Revolver?
An asset-based revolver is a committed revolving line of credit in which the lender's willingness to advance funds is tied directly to the liquidation value of specific current assets pledged as collateral, most commonly accounts receivable and inventory, and sometimes machinery, equipment, or real estate. The borrower can draw, repay, and redraw repeatedly during the commitment period (frequently three to five years), which is why multi-year ABL facilities appear in the capital structure discussion even though they fund short-term needs.
Contrast this with a cash-flow revolver, where the lender looks primarily at projected EBITDA and leverage ratios and controls risk through financial covenants (leverage, interest coverage, fixed charge coverage). Asset-based lenders look first at collateral and control risk through collateral monitoring and a limited covenant package. ABL is therefore well suited to companies that are asset-rich but have volatile, seasonal, or thin earnings: distributors, wholesalers, retailers, manufacturers, and companies in turnaround.
Key Vocabulary You Must Know
Borrowing base: The maximum amount the borrower is permitted to have outstanding, computed by applying advance rates to eligible collateral and subtracting reserves. Outstanding loans may never exceed the lesser of the borrowing base and the facility commitment.
Advance rate: The percentage of eligible collateral value the lender will lend against. Typical ranges: 80 to 90 percent of eligible receivables; 50 to 65 percent of eligible inventory at cost (or often 85 percent of net orderly liquidation value, NOLV); lower rates for work-in-process or specialized equipment. Higher quality, more liquid collateral receives higher advance rates.
Eligible collateral: Assets that meet the credit agreement's criteria. Common receivable eligibility rules exclude accounts over 90 days past invoice (or 60 days past due), the full balance of any customer with more than 50 percent of its receivables past due (the cross-aging rule), concentrations above a stated percentage of total receivables, foreign accounts without insurance or letters of credit, affiliate or intercompany accounts, government accounts not assigned under the Assignment of Claims Act, contra accounts (where the customer is also a supplier), bill-and-hold, consignment, and disputed accounts. Inventory eligibility typically excludes work-in-process, slow-moving or obsolete goods, goods in transit, consigned goods, and inventory at locations without landlord waivers.
Ineligibles: Collateral that fails the eligibility tests and is deducted before advance rates are applied.
Reserves: Lender-determined deductions from the borrowing base for specific risks: dilution reserves (credit memos, returns, discounts), rent reserves for leased warehouses, outstanding letters of credit, accrued payroll or tax liens, and seasonal or inventory shrink reserves.
Dilution: The percentage of receivables that is settled in something other than cash (returns, allowances, write-offs). Lenders measure dilution and often set the receivable advance rate at roughly 100 percent less dilution less a cushion.
Availability (excess availability): Borrowing base minus loans outstanding minus letters of credit issued. This is the practical liquidity number treasury tracks every day.
Borrowing base certificate (BBC): A report, signed by an authorized officer, submitted weekly or monthly (daily for highly leveraged borrowers) that lists collateral balances, ineligibles, advance rates, reserves, and resulting availability. Misstating a BBC is typically an event of default.
Field examination (collateral audit): Periodic on-site review by the lender or its agent testing receivable aging, inventory counts, dilution, and the accuracy of BBCs. Inventory often also requires an independent appraisal to set NOLV.
Cash dominion: The lender's control over collections. Under full dominion, customer payments go to a lender-controlled lockbox or blocked account and are swept daily to pay down the revolver; the borrower then re-borrows for disbursements. Under springing dominion, the lender takes control only if availability falls below a threshold or a default occurs. Dominion is the main reason ABL lenders can accept weaker credit profiles.
Springing covenant: Many ABL agreements have only one financial covenant, a minimum fixed charge coverage ratio (often 1.0x or 1.1x), tested only when excess availability drops below a trigger such as 10 to 12.5 percent of the commitment.
How the Borrowing Base Works: Step by Step
Step 1: Start with gross collateral balances from the aging report and perpetual inventory records.
Step 2: Subtract ineligibles to arrive at eligible collateral.
Step 3: Multiply each eligible category by its advance rate.
Step 4: Apply any sub-limits (for example, inventory availability may not exceed a fixed dollar cap or a percentage of total availability).
Step 5: Subtract reserves.
Step 6: The result is the borrowing base. Compare it to the facility commitment; the lesser of the two is the maximum permitted outstanding.
Step 7: Subtract loans outstanding and letters of credit to find excess availability.
Worked Example
Facility commitment: $25,000,000.
Gross accounts receivable: $18,000,000. Ineligibles: $3,000,000 (over 90 days, concentration excess, foreign). Eligible receivables: $15,000,000. Advance rate 85 percent: $12,750,000.
Gross inventory at cost: $14,000,000. Ineligibles: $4,000,000 (WIP, in-transit, obsolete). Eligible inventory: $10,000,000. Advance rate 50 percent: $5,000,000. Inventory sub-limit $6,000,000, so $5,000,000 stands.
Reserves: rent reserve $400,000 and dilution reserve $350,000, total $750,000.
Borrowing base: $12,750,000 + $5,000,000 - $750,000 = $17,000,000.
Lesser of borrowing base and commitment: $17,000,000 (the commitment of $25,000,000 is not the binding constraint).
Loans outstanding $11,000,000; letters of credit $1,500,000.
Excess availability: $17,000,000 - $11,000,000 - $1,500,000 = $4,500,000.
Interpretation: Even though the bank committed $25 million, the company can borrow only $4.5 million more today. If a large customer pays late and $2 million of receivables age past 90 days, eligible receivables drop and the borrowing base falls by $1.7 million (85 percent of $2 million). If outstandings exceed the new borrowing base, an overadvance exists and must be repaid immediately. This illustrates why treasury forecasts the borrowing base, not just the commitment.
Pricing and Costs
ABL revolvers are priced as a floating spread over a reference rate such as SOFR or the prime rate, with the spread often stepping down as excess availability increases (a pricing grid). Additional costs include an unused (commitment) fee on the undrawn portion, letter of credit fees, collateral monitoring or administration fees, field exam and appraisal costs, and upfront arrangement fees. Because the lender is better protected by collateral and dominion, the interest spread is often lower than an unsecured line would be for the same borrower, but the all-in cost including monitoring fees and administrative burden should be compared. Compute the effective annual cost by adding interest on average outstanding, unused fees on the average undrawn amount, and fixed fees, then dividing by average usable funds.
Advantages and Disadvantages
Advantages: availability grows with sales and inventory (self-liquidating alignment with the operating cycle); fewer and looser financial covenants; accessible to borrowers with weak or volatile earnings; multi-year committed funding; often lower spread than unsecured alternatives for leveraged credits.
Disadvantages: heavy reporting and administrative burden; lender discretion over eligibility and reserves can shrink availability unexpectedly; cash dominion reduces operating flexibility; availability shrinks in a downturn exactly when the company needs cash; collateral is encumbered, limiting other financing; monitoring fees and audits add cost.
Related Comparisons the Exam Likes
ABL revolver versus factoring: In factoring the receivables are sold (often without recourse) and the factor assumes collection and credit risk; in ABL the receivables remain on the balance sheet as collateral and the borrower keeps credit risk. ABL revolver versus receivables securitization: securitization sells receivables to a bankruptcy-remote special purpose entity that issues commercial paper or notes; it is typically larger scale and off-balance-sheet oriented. ABL revolver versus cash-flow revolver: collateral-driven availability and dominion versus EBITDA-driven covenants. ABL revolver versus commercial paper: CP is unsecured short-term paper available only to high-grade issuers, usually backed by a committed revolver as liquidity support.
Treasury's Role
Treasury prepares and certifies the borrowing base certificate, forecasts availability alongside the cash forecast, manages the lockbox and sweep arrangements under dominion, monitors covenant triggers, coordinates field exams, negotiates eligibility definitions and advance rates at origination (these negotiations matter as much as the interest spread), and decides daily draw and repayment amounts to minimize interest while maintaining a liquidity cushion.
Exam Tips: Answering Questions on Borrowing Base and Asset-Based Revolvers
1. Apply the formula in the correct order. Gross collateral minus ineligibles equals eligible collateral; eligible collateral times advance rate equals gross availability; subtract reserves to get the borrowing base; then take the lesser of the borrowing base and the commitment; then subtract outstandings and letters of credit for excess availability. The most common trap is applying the advance rate to gross rather than eligible collateral.
2. Never forget the "lesser of" rule. If a question gives both a commitment and a borrowing base, the maximum borrowing is the smaller number. Distractor answers will show the commitment when the borrowing base is smaller, or vice versa.
3. Watch for letters of credit. Outstanding letters of credit consume availability even though no cash has been advanced. Subtract them.
4. Know the typical advance rates and why they differ. Receivables (80 to 90 percent) are more liquid and self-converting than inventory (50 to 65 percent of cost); finished goods beat raw materials, and work-in-process is usually ineligible. If a question asks which collateral earns the highest advance rate, choose receivables; if it asks which is usually ineligible, choose WIP or intercompany receivables.
5. Memorize the classic ineligibles. Over 90 days, cross-aged accounts, concentration excess, foreign, affiliate, contra, government without assignment, disputed, consignment, in-transit. Exam items often describe a receivable and ask whether it qualifies.
6. Recognize ABL by its signals. Words like collateral monitoring, borrowing base certificate, field exam, lockbox dominion, advance rate, and springing fixed charge covenant all point to asset-based lending. Words like leverage ratio, EBITDA, and unsecured point to cash-flow lending.
7. Understand who ABL is for. If a scenario describes a company with strong working capital assets but weak, seasonal, or volatile earnings, or a company that cannot meet cash-flow covenants, asset-based lending is the likely best answer.
8. Distinguish ABL from factoring and securitization. ABL keeps receivables on the books and retains credit risk; factoring sells them, often transferring credit risk; securitization uses a special purpose entity. Questions on "which option removes receivables from the balance sheet" are not asking about ABL.
9. Think about direction of change. If sales fall or receivables age, the borrowing base shrinks; if the lender raises reserves or lowers advance rates, availability shrinks; if the company collects faster or inventory becomes more liquid, availability grows. Be ready to explain why ABL availability is procyclical and why treasury maintains a cushion above the springing covenant trigger.
10. Read units carefully. Inventory may be given at cost or at NOLV with different advance rates; percentages may be quoted of commitment or of borrowing base for covenant triggers. Highlight the base to which each percentage applies.
11. In cost questions, include all fees. Effective cost equals interest plus unused fees plus monitoring and arrangement fees, divided by usable proceeds. A facility with a lower spread but heavy fees may be more expensive.
12. Remember treasury's responsibilities. Questions may ask what the treasurer must do under an ABL agreement: submit accurate borrowing base certificates, maintain lockbox and sweep arrangements, cooperate with field exams, and monitor excess availability against covenant triggers.
Sample Question 1
A company has a $20 million ABL revolver. Eligible receivables are $12 million (advance rate 85 percent), eligible inventory is $8 million (advance rate 50 percent), reserves are $500,000, loans outstanding are $9 million, and letters of credit total $1 million. What is excess availability?
Solution: Receivable availability $10.2 million plus inventory availability $4.0 million minus reserves $0.5 million equals borrowing base $13.7 million. Lesser of $13.7 million and $20 million is $13.7 million. Subtract $9 million loans and $1 million letters of credit: excess availability is $3.7 million.
Sample Question 2
Which receivable would most likely be classified as ineligible in a borrowing base? (a) A $50,000 invoice from a domestic customer, 45 days old. (b) A $50,000 invoice from a foreign customer with no credit insurance. (c) A $50,000 invoice from a customer representing 8 percent of total receivables. (d) A $50,000 invoice from a long-standing customer, 30 days old.
Answer: (b). Uninsured foreign receivables are standard ineligibles; the others meet typical aging and concentration tests.
Sample Question 3
A manufacturer with highly seasonal earnings and large inventories has been unable to satisfy the leverage covenants in its unsecured cash-flow revolver. Which financing alternative best fits its profile?
Answer: An asset-based revolver, because availability is tied to collateral rather than earnings and covenants are minimal, typically a springing fixed charge coverage test.
Final Review Checklist
Can you define borrowing base, advance rate, eligible collateral, reserves, dilution, excess availability, borrowing base certificate, field exam, and cash dominion? Can you compute availability in the correct order, including the lesser-of rule and letters of credit? Can you explain why receivables receive higher advance rates than inventory? Can you list at least six common ineligibles? Can you distinguish ABL from cash-flow lending, factoring, and securitization? Can you describe treasury's daily responsibilities under an ABL agreement? If yes to all, you are ready for this topic on the CTP exam.
Test mode:
CTP - Borrowing Base and Asset-Based Revolvers Example Questions
Test your knowledge of Borrowing Base and Asset-Based Revolvers
Question 1
A company's asset-based revolver contains a springing cash dominion provision triggered when excess availability falls below a set threshold. No other provision in the agreement references that threshold. A seasonal inventory build pushes excess availability below the threshold, and no covenant is breached. Which change should the treasurer build into the cash forecast?
Question 2
In an asset-based revolver, what term describes the lesser of the borrowing base or the total commitment, minus outstanding loans and letters of credit issued under the facility?
Question 3
In an asset-based revolving credit facility, which type of account receivable is most commonly classified by the lender as ineligible collateral for the borrowing base?
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21 questions (total)
Other Capital Structure and Long-Term Capital concepts
Acquisition Financing and Change of ControlAfter-Tax Cost of DebtBond Features: Call, Convertible and FloatingBond Pricing, Yield and DurationCapital Structure Theory and LeverageCommodity Hedging InstrumentsCost of Equity: CAPM and Dividend GrowthCovenant Compliance, Waivers and AmendmentsCredit Agreement Terms, Defaults and SecurityCredit Ratings and Credit RiskCredit Spreads and Market AccessDebt Issuance Process and IndenturesDebt Retirement and RefinancingDivestitures and Treasury SeparationDividend Policy and Share RepurchasesEquity Issuance MethodsFinancial Covenants: Maintenance versus IncurrenceFixed-Income Instrument TypesFixed versus Floating Rate Borrowing DecisionsHedge Accounting and EffectivenessInterest Rate Swaps, Caps, Floors and CollarsLease Financing and AlternativesLoan Pricing: Reference Rates and SpreadsLong-Term Investment Policy and Asset AllocationPension and Benefit Plan Investment OversightPortfolio Performance Measurement and BenchmarksPost-Issuance Compliance and DisclosureRevolver All-In Cost CalculationRevolving Credit Facility MechanicsSyndicated Facility Types and TranchesSyndicated Loan FeesSyndicated Loan Structure and RolesTreasury Due Diligence in Mergers and AcquisitionsWeighted Average Cost of CapitalYield Curve Shapes and Rate Expectations