What does a borrowing base actually count as eligible?
Market-practice rules of thumb — label them as such, never as a quote — put eligible AR in a 70–85% band and eligible inventory in a 40–60% band, with WIP lower or excluded. M&E, when it is in the base at all, follows appraised OLV plus a haircut the lender names. Confirm every percentage with the institution that will sign the agreement.
Buying a manufacturing business on ABL still needs equity. Availability is not a down payment. How lenders underwrite manufacturers is the artifact list. This page is the base math.
Why does WIP take a deeper haircut than finished goods?
Work-in-process is a traveler, a percentage-of-completion estimate, and a pile of partly cut metal. A liquidator cannot sell a half-finished housing as easily as a boxed spare. Job shops that book WIP at quoted margin instead of cost incurred turn the base into fiction. Quality-hold and obsolete components are not finished goods because the CIM used one inventory total.
Inventory in valuation is the pricing sibling. The ABL examiner is the monthly sibling. Both want classes: raw, WIP, finished, hold, consignment, customer-owned. A single number is how first-time operators discover ineligibility after the wire.
How should a buyer keep the peg and the base from colliding?
Write two exhibits. The working-capital peg defines target NWC for purchase-price true-up: method, look-back, E&O, treatment of deposits and unbilled AR, physical at close. The borrowing-base certificate defines eligible assets for availability after close: aging, ineligibles, reserves, audit rights.
If you use the peg average as if it were opening availability, you will overpay for inventory the revolver will not advance against. If you use the opening base as if it were the peg, you will fight the seller about items the purchase agreement never defined. HedgeStone will not let a letter of intent say "customary NWC and a standard ABL" as if those words had a manufacturing meaning.
When does ABL replace cash-flow paper on a manufacturer?
When leverage or concentration makes a cash-flow senior or a 7(a) fail, but the book still has quality AR and countable inventory. Standard 7(a) remains a $5 million box (Source: SBA). Combined 7(a)+504 can reach $10 million only when occupancy and both programs fit (Source: SBA). Many $1–3 million EBITDA files sit above that box. Buying above the SBA cap is the buyer-side twin.
IBBA Pulse Q1 2026 put 83% of deals over $5 million at three or more offers (Source: IBBA). Competition does not thicken thin AR. A strategic paying cash and an ABL buyer are not the same closing risk.
| Base item | Market-practice treatment (not a quote) | Common ineligible | Who confirms |
|---|---|---|---|
| Trade AR | 70–85% of eligible | Aged, affiliate, disputed POC, over-concentration | ABL lender / examiner |
| Finished goods | 40–60% of eligible | Hold, obsolete, customer-owned | Examiner + count |
| WIP | Lower than finished, or excluded | Hope-margin travelers | Examiner + job-cost |
| Raw | Inside inventory band if owned and usable | Consignment; short-clock electronics | Examiner |
| M&E | OLV minus a haircut, if included | Dirty UCC; missing serials | Appraiser + lender |
| Reserves | Dilution, warranty, seasonal | Ignoring seasonality | Credit officer |
Cash-flow DSCR on manufacturing is often discussed as a 1.20–1.30x market-practice band. ABL files still run coverage tests. They just do not pretend coverage replaces a base.
What ineligible AR and inventory surprise first-time operators?
Progress-bill receivables on long-cycle OEM work that the customer has not accepted. Foreign accounts without credit insurance. Related-party sales the CIM treated as third-party. Warranty reserves that never hit the certificate. Electronics components with a short clock. Food ingredients inside a shelf-life window the examiner will not finance. Tooling the customer owns.
Seasonal books move availability even when the annual P&L looks fine. A lawn-and-garden stamper with a fat winter inventory and thin spring AR is a different base in March than in October. Write the seasonal reserve before you model year-one draws.
How do concentration and seasonal books move availability?
A 35% customer is not only a valuation haircut. It is a cap in the eligibility exhibit. If the cap is 25%, the extra 10% of that name is ineligible before the 70–85% advance is applied. That is how a "strong book" produces a thin revolver.
Main Street manufacturing in the BizBuySell 2021–2025 set cleared at 2.75x median SDE (Source: BizBuySell via Iconic). Many of those shops never see a field exam. The ones that do should still class inventory as if an examiner were coming. Financing options is the menu. ABL is one plate.
What does a $2.4 million inventory number look like after eligibility?
CIM inventory $2.4 million. After E&O and customer-owned tooling, eligible inventory is $1.7 million. Finished goods $1.1 million at a 50% market-practice advance is $550,000. WIP $600,000 at a deeper haircut — say excluded — is zero. Opening AR eligible $1.2 million at 80% is $960,000. Headline "we have $3.6 million of working assets" became about $1.5 million of availability before reserves. That gap is the price conversation, not a surprise for month two.
Jason Taken is a business broker. He does not set advance rates or issue borrowing-base certificates. Educational information only. Confirm eligibility, exams, and covenants with the ABL lender and counsel. Data current as of September 2026.
How should a field exam share a week with the quality-of-earnings team?
The examiner will test invoices, shipping evidence, and inventory classes. The QoE team will test revenue cut-off and job-cost. If those two rooms disagree about when a job became a receivable, the credit memo will believe the worse story. Schedule them to compare notes before anyone argues with the seller about the peg.
Do not hide the aged AR schedule because it is ugly. Hide it and the examiner will find it with a larger reserve. Put dilution history — credits, returns, warranty — in the same folder as the aging. Dilution is how an 80% advance becomes a 70% advance without anyone changing the "market-practice" sentence on a website.
How should a buyer model opening liquidity after the true-up, not before it?
Availability on the term sheet is not cash in the account on Monday. Subtract the peg true-up if the cage is light. Subtract ineligibles the examiner has not yet named. Subtract a seasonal reserve if the close sits in the thin month. Subtract the first payroll and a materials buy. What remains is opening liquidity. If that number is negative, the stack is short equity, not short adjectives.
Buyers who treat the CIM inventory total as opening availability are the reason ABL files blow up. Sellers who refuse a physical count are choosing a fight. Write the count protocol in the letter. Hire the examiner early enough that the count and the exam can share a week.
A revolver that looks large on a borrowing-base estimate can still have a cap below that estimate. Read the line cap, the sublimits, and the springing dominion language. Dominion is not a personality insult. It is how the lender gets paid when dilution rises.
What reporting cadence should an operator expect after an ABL close?
Weekly or monthly borrowing-base certificates. Periodic field exams. Covenant packages that may include minimum availability, not only DSCR. Inventory-count rights. Appraisals on a refresh cycle. Operators who have never issued a certificate will need a controller who can. Recasting that controller out of the go-forward model is how the first certificate is late and the first default is technical.
Put the reporting calendar in the 90-day plan. Name the person. Name the software extract. If the ERP cannot produce eligible AR and classed inventory, budget a workaround before close, not after the first exam. ERP and job-costing systems is the systems sibling.
Concentration caps can change after close if a customer grows. A 28% name that becomes 36% is not a valuation debate anymore. It is ineligible surplus. The operator should know the cap the week they sign the letter.
How do customer-owned materials and consignment wreck an otherwise pretty base?
Material the customer owns is not your inventory. Consignment you placed at a customer is not always eligible. Tolling work can create AR without creating inventory the lender will take. Electronics kits on consignment with a short clock can be worthless before the exam lands. Write those facts on the class schedule.
A food plant with ingredients inside a remaining shelf life the examiner will not finance is a different base than a steel service center with plate that has a market. Do not copy a steel advance-rate rumor onto a food book. Market-practice bands are already labeled as such. Sub-sector still picks the row.
What should a first-time operator ask the examiner on day one of the field exam?
Ask which invoices were selected, which inventory classes were counted, and which ineligibles were added that the CIM never named. Write the answers down. Those answers become the opening certificate. Arguing later that "the CIM said $2.4 million" is not an argument. The exam is the argument.
Ask whether dilution was computed from credits and warranty or guessed. A guessed reserve will move. A computed reserve can be managed. Bring the credit-memo history. Hide it and the reserve grows.
Standard 7(a) still caps at $5 million if anyone hoped ABL was optional (Source: SBA). For files above that box, the exam is the product. Staff it.