Drawing power is the amount a business can actually borrow at any given moment from a revolving credit line, calculated from the current value of eligible collateral after the lender applies its safety margins. Even if a bank has sanctioned a $500,000 line, you can only draw what your inventory and receivables support today. The rule is simple: you’re capped at the lower of the sanctioned limit or the current drawing power.1Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing Because collateral values move constantly, lenders in asset-based lending recalculate the figure as often as daily.
What Counts as Eligible Collateral
Two asset categories drive the calculation: inventory and accounts receivable. Not all of either qualifies.
Inventory counts only if the business has fully paid for it. Unpaid stock carries the risk that a supplier with a properly perfected purchase-money security interest under UCC Article 9 could jump ahead of the lender’s lien on that same inventory.2Legal Information Institute (Cornell Law School). UCC 9-324 Priority of Purchase-Money Security Interests Obsolete, damaged, or slow-moving stock gets excluded as well, and work-in-progress that isn’t near completion generally doesn’t count. Finished goods usually get a higher advance rate than raw materials because they’re closer to generating cash.1Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing
Receivables face age and quality screens. Invoices typically become ineligible once they pass a multiple of the payment terms. For a customer on 30-day terms, the common cutoff is 90 days from the invoice date.1Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing Federal banking guidance also strips out several other categories: entire customer balances where more than 50 percent is past due, non-trade receivables like royalties and rebates, consignment or guaranteed-sale invoices the buyer can return, intercompany and affiliate invoices, foreign receivables, balances excessively concentrated in one customer or industry, and notes receivable or progress billings that don’t represent completed sales.3eCFR. Appendix C to Subpart A of Part 327 – Description of Concentration Measures
How Lenders Calculate the Number
Once the lender identifies eligible collateral, it applies an advance rate to each category. The advance rate is the percentage of the collateral’s value the bank is willing to lend against. According to the Office of the Comptroller of the Currency, receivables typically carry advance rates between 70 and 85 percent, with some lenders going as high as 90 percent for strong business-to-business accounts.4Office of the Comptroller of the Currency. Asset-Based Lending – Comptrollers Handbook Inventory advance rates run lower, generally 20 to 65 percent of book value.1Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing
A simple example. Say a business has $200,000 in eligible inventory and $300,000 in eligible receivables after exclusions. The lender applies 50 percent to inventory and 80 percent to receivables:
- Inventory: $200,000 × 50% = $100,000
- Receivables: $300,000 × 80% = $240,000
- Drawing power: $340,000
If the sanctioned credit limit is $500,000, you can only access $340,000, because that’s what the collateral supports. If the sanctioned limit were $250,000, you’d be capped at $250,000 even though the collateral could support more.1Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing
The Cross-Aging Rule
One detail catches a lot of borrowers off guard. Under the cross-aging rule, if a specified percentage of a single customer’s receivables is delinquent, the lender may remove all receivables from that customer, not just the overdue invoices. The common threshold is 10 percent. So if a customer owes you $100,000 across ten invoices and just $11,000 of that is past due, the lender can pull the entire $100,000 out of your eligible receivables.1Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing One slow-paying customer can shave tens of thousands off your borrowing capacity overnight.
What Happens If You Borrow More Than Your Drawing Power
An over-advance occurs when the outstanding loan balance exceeds the current borrowing base, and it can happen without any deliberate action on your part. A large customer return that shrinks receivables, a drop in inventory value, or a cross-aging event can all pull drawing power below what you’ve already borrowed.
Most lenders cap planned over-advances at no more than 10 percent of the borrowing base, and even those require pre-approval with a defined repayment plan. An unapproved over-advance is treated as a technical default. The lender can demand immediate repayment, renegotiate terms, require additional collateral, or liquidate the collateral entirely. Frequent or persistent over-advances also carry a legal risk for the bank itself: if it ignores them repeatedly, it may lose the right to declare default later, so lenders have an institutional push to act fast.1Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing
When a lender chooses to work with the borrower rather than call the loan, the standard approach is a repayment plan that clears the over-advance within 12 months at most. Borrowers who need longer usually have deeper problems the credit line alone cannot fix.
Borrowing Base Certificates and Field Exams
To keep drawing power current, borrowers submit borrowing base certificates that detail eligible collateral. In asset-based lending, many banks require these daily or weekly rather than monthly.4Office of the Comptroller of the Currency. Asset-Based Lending – Comptrollers Handbook A typical certificate pulls from an aging report of every outstanding receivable by customer, strips out invoices past the eligibility cutoff, and breaks down inventory by category with damaged or obsolete items removed. The numbers must reconcile to your internal books. Discrepancies between the certificate and your balance sheet invite scrutiny and can trigger an early field exam.
Lenders don’t take the certificate on faith. Field audits are standard. A bank representative visits the borrower’s facility to physically inspect inventory, review original invoices, and test whether the values on the certificates match reality. These audits typically happen quarterly, more often for higher-risk borrowers or workout situations.4Office of the Comptroller of the Currency. Asset-Based Lending – Comptrollers Handbook The borrower pays for them. If the auditor finds inventory shortfalls or receivables that aren’t as current as reported, the lender will reduce the borrowing base immediately and may impose default-rate interest or accelerate repayment.
Why Accuracy on the Certificate Matters
Inflating inventory counts or including ineligible receivables on a borrowing base certificate is not just a breach of the loan agreement. It can be a federal crime. Under 18 U.S.C. § 1014, anyone who knowingly makes a false statement or willfully overvalues property to influence a loan decision at a federally insured bank faces fines up to $1,000,000, imprisonment up to 30 years, or both.5Office of the Law Revision Counsel. 18 USC 1014 Loan and Credit Applications Generally The federal bank fraud statute carries the same penalty range for schemes to defraud a financial institution through false representations.6Office of the Law Revision Counsel. 18 USC 1344 Bank Fraud
Civil consequences are severe even without prosecution. Misrepresentation of collateral is typically an event of default, letting the lender demand full repayment and seize the collateral. Every certificate is a signed representation to a federally regulated institution, and the person who signs it is personally on the hook for its truthfulness.