The Borrowing Base Shrank After the First Field Exam

A borrowing base is only as accurate as the reporting behind it, and the first field exam is the first time that reporting gets tested the lender’s way.

An asset-based line is sized on collateral, and the collateral is measured from the borrower’s own reports: the receivables aging, the inventory listing, the credit memos. At closing those reports are taken largely as presented. The field exam comes afterwards, sometimes as a post-closing condition and always within the first year, and it measures the same collateral by the lender’s definitions rather than the company’s.

For most businesses, the number it produces is smaller. Not because anyone misreported, but because a finance team’s reporting and a lender’s eligibility rules were built for different purposes.

A reseller closes on its own numbers

Take an illustrative case. A technology hardware reseller with $60 million in annual revenue sells servers, networking equipment and support contracts to mid-market companies. It closes a revolving line against $8.0 million of eligible receivables at an 85 percent advance and $3.0 million of eligible inventory at 50 percent.

The borrowing base at closing is $8.30 million. The company draws $6.5 million to fund a large customer deployment, leaving $1.80 million of headroom, which is the number the next two quarters are planned around.

What the exam found

The examiners test four things, and each one moves.

Invoices for goods not yet delivered. The reseller bills some hardware when the order is confirmed and support contracts annually in advance. Those invoices sit in the aging like any other receivable, but a lender only advances against goods delivered and services performed. $900,000 comes out of eligible receivables. At 85 percent, that is $765,000 of availability.

Dilution. Credit memos for returns and price adjustments run at 8 percent of billings when measured against the full ledger, not the 3 percent the company tracked on hardware returns alone. Credit agreements commonly cut the advance rate one point for every point of dilution above 5 percent. The receivables advance falls from 85 to 82 percent, worth $213,000 on the remaining eligible balance.

Leased warehouses. Inventory sits in two leased facilities with no landlord agreement giving the lender access to it. Lenders commonly reserve two to three months of rent at each such location. At $80,000 a month combined and three months, the reserve is $240,000.

Demo units. $400,000 of demonstration and loaner equipment is carried in inventory. It is not for sale in the ordinary course and comes out, worth $200,000 at the inventory advance.

Seventeen percent, and no bad debt

The borrowing base goes from $8.30 million to $6.88 million, a reduction of $1.42 million, or 17 percent. Headroom goes from $1.80 million to $382,000.

Not one invoice went unpaid. The customers are the same, the inventory is the same, and the business is performing to plan. What changed is the measurement. The company counted its collateral the way its accounting system does, and the lender counted it the way its credit agreement does.

A business that planned the quarter around $1.80 million of availability now has a fifth of it, discovered in the middle of a deployment it borrowed to fund.

Why the gap is almost always there

None of these findings is unusual, and none implies bad faith. Billing on order confirmation is a sensible way to run a reseller’s cash cycle. Tracking returns rather than every credit memo is how most operating teams think about dilution. Nobody negotiates landlord agreements until someone asks for one. Demo units live in inventory because that is where the accounting puts them.

The pattern generalizes. Every borrowing base carries definitions that the company’s own reporting does not use, and the first exam is where they meet. The size of the gap depends less on the quality of the business than on how far its reporting habits sit from the lender’s eligibility rules.

The exam worth running before closing

The adjustments fall into two groups. Some can be fixed. Landlord agreements can be negotiated before closing, which removes the $240,000 reserve entirely and would have left availability at $7.12 million rather than $6.88 million.

The rest cannot be fixed, only known. Pre-billed invoices, full-ledger dilution and demo units are real features of how the business operates. But known in advance, they change the plan: the line is sized to the base the exam will find, the deployment draw is set against real headroom, and the dilution definition is negotiated in the credit agreement rather than discovered in the exam report.

A mock field exam, run on the lender’s definitions before the facility is signed, turns a surprise in month four into a sizing decision in month zero.

How Thalos Capital Approaches This

Thalos Capital works borrower-side on asset-based lending from $50 thousand to $100 million and above, across the United States. The work starts with the collateral measured the way a lender will measure it: eligibility, dilution on the full ledger, reserves by location, and the items an exam will take out before any advance rate applies.

That produces a borrowing base the business can plan around, the fixable items addressed before closing, and the definitions that matter negotiated into the facility rather than inherited from a standard form. It also shows which sources will advance most against this particular collateral, because eligibility rules differ from one lender to the next.

The reseller in the example had good collateral and a clean business. What it did not have was its own borrowing base, measured before someone else measured it.

Most financing situations have more options than the borrower initially sees. A conversation is enough to map them. Submit your financing request at https://thaloscapital.com/contact.