Oct 6, 2026 Ā· @Smart Business Funding
By Anthony Collin Ā·
An asset-based lender can approve a $1 million line and still let you draw far less. The gap comes from seven numbers most owners never see until the term sheet arrives.
Know them in advance and you can raise your borrowing power before you apply, instead of discovering the limits after you’ve signed.
1. Advance rate
What it is: the share of each asset’s value the lender will fund.
Typical range: 70%ā85% on eligible receivables, sometimes higher; up to about 65% on inventory, measured against liquidation value (ABF Journal on the OCC handbook).
How to improve it: bill creditworthy customers, keep invoices current, and keep inventory saleable. We list typical rates for nine asset types in 9 Things on Your Balance Sheet a Lender Will Fund.
2. Borrowing base vs. your credit limit
What it is: the credit limit is the maximum written into the agreement. The borrowing base is what your eligible collateral actually supports today, and you can draw only the lower of the two.
Borrowers often find their effective limit sits well below the stated facility size (Ratio). Because the base is recalculated as receivables and inventory change, your access can shrink in a slow month.
How to improve it: report collateral accurately and on time, and plan draws around the base, not the headline limit.
3. Receivables aging
What it is: how old your unpaid invoices are.
Typical rule: invoices more than about 90 days from invoice date, or 60 days past due, drop out of the base. Cross-aging can remove a customer’s whole balance once a set share, often 25% or 50%, of its invoices is aged (Ratio).
How to improve it: chase slow payers before they hit the cutoff. One late customer can wipe out far more availability than the overdue invoice itself.
4. Customer concentration
What it is: how much of your receivables come from one customer.
Typical cap: 10% to 20% of eligible receivables per customer, with higher caps sometimes allowed for investment-grade customers (Ratio). Anything above the cap is excluded.
How to improve it: broaden your customer base, or ask the lender for a higher cap on a very strong customer.
5. Dilution
What it is: the share of invoiced sales you never collect because of returns, credits, discounts and disputes.
Typical treatment: lenders often set a threshold around 5%. Above it, a common approach is to cut the advance rate by one point for each point of excess dilution, or add a dilution reserve (Ratio).
How to improve it: tighten return policies, resolve disputes fast, and document credits clearly.
6. Excess availability
What it is: the unused room between what you’ve drawn and your borrowing base.
Why it matters: many agreements require a minimum cushion, such as 10% of the borrowing base. When availability falls below that trigger, stricter terms can switch on, including daily cash sweeps and on-demand field exams (Clear Value Lending).
How to improve it: don’t run the line to the edge. Treat the trigger as your real ceiling.
7. Fixed charge coverage ratio (FCCR)
What it is: your cash flow available to pay fixed obligations, divided by those obligations (interest, scheduled principal and similar charges).
Typical requirement: many asset-based lines include a “springing” FCCR covenant of 1.0x to 1.1x that is tested only when excess availability drops below the trigger (Clear Value Lending). Public filings show the same pattern, for example a 1.0-to-1.0 test that applies when availability falls under 10% (SEC filing).
How to improve it: keep availability above the trigger so the test never springs, and know your ratio each quarter in case it does.
Worked example: how the seven numbers stack up
Illustrative Composite Scenario. Hypothetical figures for teaching purposes; not a real client, offer or approval.
A building-supply distributor has a $1,000,000 line and $1,000,000 of current receivables. At an 85% advance rate, the owner expects $850,000 of availability. Here’s what the lender actually calculates:
| Step | Calculation | Result |
|---|---|---|
| Current receivables | , | $1,000,000 |
| Concentration: one customer is 35% of receivables, cap is 20% | $350,000 ā $200,000 excluded | $850,000 eligible |
| Dilution runs 8% against a 5% threshold | 85% advance rate ā 3 points | 82% advance rate |
| Borrowing base | $850,000 Ć 82% | $697,000 |
| Springing trigger (10% of base) | $697,000 Ć 10% | $69,700 minimum cushion |
| Safe working ceiling | $697,000 ā $69,700 | $627,300 |
The owner expected $850,000 and can comfortably use about $627,000. Two fixes, diversifying away from the big customer and cutting credits, would recover most of the gap.
If the owner had drawn $680,000, excess availability would fall to $17,000. That’s below the trigger, so the springing FCCR test applies. With $600,000 of cash flow covering $500,000 of fixed charges, the ratio is 1.2x and passes a 1.0x test, but with little margin.
What to do before you apply
- Pull your receivables aging and remove anything past 90 days.
- Check your largest customer’s share of receivables.
- Calculate last year’s dilution: credits and returns divided by gross invoiced sales.
- Estimate your borrowing base with conservative advance rates.
- Review the fee and covenant terms covered in 6 Red Flags Hiding in an Asset-Based Lending Term Sheet.
Some businesses find these numbers don’t fit, especially those with few receivables or uneven inventory. If that’s you, see whether your sector is a natural match in 8 Industries Where Asset-Based Financing Fits, or consider options that don’t run on a borrowing base. A merchant cash advance like our Direct Fund Program is based on revenue consistency instead, with a fixed daily or weekly remittance. Equipment financing is secured by the equipment itself, and a business line of credit may need less ongoing reporting.
See the industries we work with and how our process works. Want a second look at your numbers? Contact our team or start an application. More at smartbusinessfunder.com or 1-866-Re-Smart.
This article is for general education and is not legal, tax or financial advice. Advance rates, eligibility rules and covenants vary by lender and agreement and are subject to underwriting. The Direct Fund Program is a purchase of future receivables, not a loan. Scenarios labeled Illustrative Composite Scenario are hypothetical.
You can see every program side by side on our business funding page, and read how each works in our business financing guide.
Your next step
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