Advance Rate Guide: What Determines How Much You Can Borrow Against Collateral

An advance rate is the percentage of a collateral asset's eligible value that a lender will lend against. It's the discount between what an asset is worth and what a lender will give you for it. The gap — the portion the lender will not advance — is their cushion against loss if you default and the asset has to be liquidated.

A lender advancing 80% against receivables is saying: if we had to collect these invoices ourselves in a distressed situation, we're confident we'd recover at least 80 cents on the dollar, probably more. The remaining 20% absorbs collection costs, disputed invoices, slow payers and any dilution that reduces what actually comes in.

Advance rates are not arbitrary. They're informed by decades of lender experience with recovery rates in actual defaults across each collateral category. They're also negotiable — within ranges. No ABL lender will advance 95% on receivables regardless of your customer quality. But the difference between 75% and 85% is real and worth fighting for. For a $5 million eligible AR pool, that gap is $500,000 in availability.

For context on how advance rates feed into your total borrowing capacity, see our guide to what a borrowing base is and how the certificate works.

Receivables get the highest advance rates because they're the most liquid and verifiable asset class in a manufacturer's borrowing base. An invoice is a documented, dated claim against a known counterparty. The lender can verify it exists. They can confirm the customer received goods or services. The collection timeline is predictable.

The typical range is 70-85% of eligible receivables. Where within that range you land depends on several factors:

Dilution: The Hidden Rate Killer

Dilution is the percentage of gross AR that does not result in a cash collection at face value. Credits issued for returns, early pay discounts taken by customers, write-offs for uncollectable accounts and short payments all contribute to dilution. If you invoice $10 million in a year and only collect $9.4 million net of credits and adjustments, your dilution rate is 6%.

Lenders typically run a dilution analysis on your trailing twelve months before setting the advance rate. A dilution rate below 2-3% rarely affects the rate. Dilution above 5% starts reducing it. Above 8-10%, some lenders won't include AR in the borrowing base at all without significant haircuts.

Manufacturers with generous return policies or aggressive early pay discount programs often underestimate how much dilution is dragging on their advance rate. Audit your credit memo history before a lender does it for you.

Concentration Limits and Their Effect

The standard single-debtor concentration limit is 25% of total eligible AR. Any receivables from a debtor that push their share above 25% are automatically excluded from the eligible pool before the advance rate is even applied. If your largest customer represents 40% of your AR, only 25% of your total eligible AR from that customer counts. The rest generates zero borrowing base credit.

Investment-grade debtors sometimes get higher concentration limits — 30-35% — because the credit risk is demonstrably lower. Worth asking your lender if your dominant customer is a creditworthy public company. See our ABL mechanics case study for a real-world concentration limit negotiation example.

Inventory advance rates are lower than AR because inventory is harder to liquidate quickly at a predictable price. If a lender has to sell your steel coil inventory in a default scenario, they need buyers who want steel coil, at prices the market will bear, within a timeframe that doesn't destroy value. That uncertainty justifies a deeper discount than receivables warrant.

The lender does not simply apply the advance rate to inventory book value. They start with the net orderly liquidation value (NOLV) — established by an independent appraisal — and apply the advance rate to that number. NOLV assumes a structured auction with reasonable marketing time, typically 60-90 days. It is usually 40-70% of book value for finished goods and considerably less for work-in-process or raw materials.

Work-in-process is the most difficult category. WIP has no independent utility. It's not finished product a buyer can use, and it's not raw material that can be redirected. It's partially assembled goods whose value depends entirely on completing the production process. Many lenders exclude WIP from the borrowing base entirely. Those who include it apply very low advance rates — sometimes 10-20% of NOLV — and require that the NOLV itself be based on a conservative liquidation scenario.

Commodity inventory — steel, aluminum, standard resins — tends to get higher advance rates because it has a liquid spot market. Specialty inventory tied to a specific customer's product design gets lower rates or is excluded entirely. If the only buyer for your custom-formed part is the OEM you made it for, and that OEM is in default, your inventory is close to worthless.

Inventory Sublimits

Most ABL facilities cap inventory's contribution to the borrowing base as a percentage of the total — often 50% of the AR component or a fixed dollar sublimit. This prevents over-reliance on inventory and ensures AR remains the primary credit support. If you're building a facility primarily against an inventory-heavy business model, negotiate the sublimit as carefully as the advance rate itself.

Equipment advance rates in ABL deals run 50-70% of orderly liquidation value. The LTV equivalent is lower than AR or inventory because equipment is the least liquid collateral class. Specialized machinery — CNC machining centers, injection mold presses, custom fabrication equipment — may have a small buyer pool and long sale timelines.

The starting point is always the OLV appraisal. Lenders require a USPAP-compliant appraisal from an approved appraisal firm, conducted within the past 12-24 months. The appraiser assigns an orderly liquidation value — what the equipment would bring in a structured auction — and a forced liquidation value (FLV), which is the distressed floor. Lenders advance against OLV, not FLV.

General-purpose equipment that has a broad resale market — standard forklifts, conventional machining centers, common material handling systems — tends to get rates at the high end of the range. Highly specialized equipment built for a single application — a proprietary forming die, a custom-configured automated assembly line, a one-of-a-kind testing fixture — gets rates at the low end or is excluded from the borrowing base entirely.

How Depreciation Affects the Advance

Equipment OLV typically declines faster than book value in the first few years, then more slowly as the asset approaches the bottom of its useful life. MACRS depreciation schedules for tax purposes don't track OLV at all — they're an accounting convention that has nothing to do with what equipment sells for on the secondary market. A 5-year-old CNC machining center that's been well maintained may have a book value near zero but still carry $400,000 of OLV. Know your actual appraisal, not your depreciation schedule.

Most ABL credit agreements require the borrower to provide updated equipment appraisals every 12-24 months, or whenever the lender requests one. If your equipment values have risen due to strong secondary markets or capacity constraints, a fresh appraisal could meaningfully expand your borrowing base without any other change to your credit profile.

Equipment Tranche Structure

Unlike the AR tranche which revolves freely, the equipment component of a borrowing base is typically a fixed, amortizing sublimit. The lender sets the equipment advance at deal close based on the appraisal, then amortizes it down quarterly over 3-5 years. You can't draw new availability from equipment as you pay down the revolver. The equipment tranche is a one-time credit support element, not a renewable one.

Advance rates aren't posted on a menu. They result from a negotiation informed by data. The lender's initial term sheet is a starting position, not a final answer. Here's what moves the needle.

Data Quality Matters More Than Most Operators Realize

A lender who receives clean, detailed AR aging with customer-level data, historical dilution analysis and aging trend data going back 24 months will advance more than a lender who receives a single-page AR summary. The quality of your reporting signals the quality of your financial management. It also removes the lender's uncertainty premium from the rate.

Present your AR aging with an explanation of any past-due balances. If three invoices are 75 days old because a specific customer has a known dispute underway that's being resolved, say so in writing. Don't make the underwriter guess. Guesses produce conservative outcomes.

Customer Credit Quality Documentation

If your largest customers are publicly traded companies or have Dun and Bradstreet ratings, pull those ratings and include them in your credit package. An underwriter who can see that your three largest customers are investment-grade will advance at a higher rate than one who can only see that they're companies you've described as "solid payers."

Competitive Tension

Getting term sheets from two or three lenders simultaneously is the single most effective way to move advance rates. Lenders know when they're competing. They know that a competing term sheet with an 83% AR advance rate makes their 78% offer look weak. Structured competition doesn't always produce a race to the top — quality lenders won't sacrifice credit discipline — but it does tighten the terms meaningfully.

The Capital Access section of this site covers how to approach the lender identification and competitive process for manufacturers in the $5-50 million revenue range.