How a Receivables-Based Working Capital Facility Works
Many growing businesses run short of cash not because they are unprofitable but because they must pay for inventory and wages before customers pay their invoices. A working capital facility tied to receivables is designed for that gap.
The borrowing base
Instead of a fixed loan amount, the facility sets a limit calculated from eligible accounts receivable, and sometimes inventory. The lender applies an advance rate to those eligible assets to produce the amount available to borrow. As invoices are issued, availability rises; as customers pay, the outstanding balance falls.
What makes a receivable eligible
Lenders typically exclude invoices that are too old, owed by related parties, in dispute, or concentrated too heavily with a single customer. Understanding the eligibility rules up front tells you how much of your receivables will actually support borrowing.
Reporting
Expect to provide a periodic borrowing base report, usually with an aged receivables listing. The reporting cycle and the collection process should be manageable for your finance team; ask what is required before you sign.
When it fits
This structure suits businesses with reliable commercial customers and a predictable collection cycle, such as distributors, manufacturers and service companies that invoice on terms. It aligns borrowing with the business cycle rather than with last year’s financial statements, and it should be sized to the eligible collateral rather than to a wish list.
This article provides general information and is not personal financial, tax, legal, or insurance advice. Obtain advice relevant to your circumstances before entering a financing arrangement.
