A working capital line of credit secured by accounts receivable and inventory doesn't automatically let you draw the full limit. The lender applies a borrowing base formula (eligible receivables times an advance rate, plus eligible inventory times a lower rate, minus reserves), and you can draw the lesser of that figure or your commitment. This guide works through a sample borrowing base certificate, net 60 customer terms, SBA's Working Capital CAPLine rules and when a line beats factoring.
How an accounts receivable line of credit works
An accounts receivable line is a revolving business line of credit secured by what customers owe you, often with inventory added. The OCC's Comptroller's Handbook on asset-based lending (version 1.1, checked October 6, 2026) says a borrower can typically draw "up to the lesser of the available borrowing base or the revolver commitment amount." Customer payments reduce the balance, and new invoices rebuild availability.
Because repayment comes from turning collateral into cash, the lender watches it closely. The handbook says ABL lenders often require borrowing base certificates weekly or monthly, that field audits happen "often quarterly but more frequently if risk dictates," and that the audit cost is "generally passed on to the borrower." Many lenders also route customer payments through a lockbox they control. In exchange, the handbook says, an ABL lender relies less on financial covenants, which suits a growing company with uneven earnings.
The borrowing base formula lenders use for accounts receivable and inventory
The math runs in four steps:
- Take gross receivables from your aging report and subtract ineligible accounts.
- Multiply eligible receivables by the receivables advance rate.
- Do the same for eligible inventory at its lower rate.
- Subtract reserves, take the lower of that total and your commitment, then subtract what you already owe.
The OCC handbook says "common advance rates range from 70 percent to 85 percent of eligible accounts receivable," with some banks going up to 90% on business-to-business receivables. For inventory, a bank "typically advances up to 65 percent of the book value of eligible inventory, or 80 percent of the NOLV" (net orderly liquidation value). Work-in-process "is frequently excluded," and consignment goods are ineligible.
The handbook's common ineligible categories:
| Ineligible category | What the OCC handbook says |
|---|---|
| Delinquent invoices | Normally ineligible when "past due by three times the terms, e.g., 90 days for 30-day terms" |
| Cross-aged customers | All of a customer's invoices can drop out once any, or some percentage, become ineligible |
| Concentrations | A single account at 10% or more of receivables; such accounts should be limited to 10% to 20% of the receivables base |
| Affiliates and contra accounts | Affiliates can deteriorate together; a customer that also sells to you can set off what you owe it |
| Foreign, government and unbilled receivables | Country risk, federal assignment requirements, or nothing billed yet |
Dilution is a quieter drag. Returns, disputes and credit memos cut what you'll collect, and the handbook says dilution "is usually expected to be 5 percent or less of receivables." Lenders can also set reserves against the base.
A worked borrowing base certificate
Every figure here is an assumption for illustration. Picture a distributor with $900,000 in receivables, $500,000 of inventory at cost and a $1,000,000 line. Its agreement, also assumed, excludes invoices more than 90 days from the invoice date, cross-ages a customer once half its balance is ineligible, caps any one customer at 20% of gross receivables and advances 80% on receivables and 50% on inventory.
| Certificate line | Amount |
|---|---|
| Gross receivables per aging | $900,000 |
| Less invoices over 90 days from invoice date | -$45,000 |
| Less cross-aged balance (Customer C) | -$20,000 |
| Less affiliate receivable | -$15,000 |
| Less contra account | -$10,000 |
| Less disputed invoices | -$12,000 |
| Less concentration excess (Customer A owes $250,000; cap is $180,000) | -$70,000 |
| Eligible receivables | $728,000 |
| Receivables availability at 80% | $582,400 |
| Inventory at cost | $500,000 |
| Less work-in-process, obsolete and consigned stock | -$125,000 |
| Eligible inventory | $375,000 |
| Inventory availability at 50% | $187,500 |
| Less dilution reserve | -$20,000 |
| Borrowing base | $749,900 |
| Less current loan balance | -$610,000 |
| Available to draw | $139,900 |
The $1,000,000 commitment overstates usable credit by about $250,000, and the largest deduction from receivables is Customer A's concentration excess. If that customer paid down, or the lender agreed to a higher cap for a strong account, availability would rise by up to $56,000 (80% of $70,000) with no new sales. A loan balance above the borrowing base is an over-advance, and your agreement spells out how fast you must cure it.
What net 60 customer terms do to your availability
Your receivables balance roughly equals daily credit sales times the days customers take to pay. Assume $3,600,000 a year in credit sales (about $9,863 a day), an 80% advance rate, no ineligibles and a 10% interest rate:
| Assumed figures | Paid in about 30 days | Paid in about 60 days |
|---|---|---|
| Receivables outstanding | about $296,000 | about $592,000 |
| Availability at 80% | about $237,000 | about $473,000 |
| Receivables you fund yourself (20%) | about $59,000 | about $118,000 |
| Yearly interest if fully drawn | about $23,700 | about $47,300 |
A borrowing base grows with receivables, so it handles longer terms better than a limit fixed at approval. The costs grow too: you carry twice the uncovered slice and pay interest on a larger balance for the same sales.
Aging is the second effect. If your agreement counts 90 days from the invoice date, a net 60 invoice drops out after only 30 days late, while a net 30 invoice gets 60. SBA's CAPLine rules are written around the due date, excluding "any invoice more than 90 days past due," and the SOP notes a borrower "may structure their receivables terms so that the due date properly reflects the cash conversion cycle" of the customer.
How the SBA's Working Capital CAPLine handles receivables and inventory
CAPLines is SBA's 7(a) umbrella for "short-term and cyclical working-capital needs," according to SBA's Types of 7(a) loans page (last updated September 5, 2025). It describes the Working Capital CAPLine as an asset-based revolving line "for businesses unable to meet credit standards associated with long-term credit." The rules below come from SOP 50 10 8.1, effective October 1, 2026.
| Rule | SOP 50 10 8.1 |
|---|---|
| Who qualifies | The applicant must generate accounts receivable (not notes receivable) and/or have inventory |
| Size and guaranty | Up to $5,000,000; maximum guaranty of 85% for loans of $150,000 or less, 75% above |
| Maturity | Up to 10 years |
| Borrowing base certificate | Required for lines of $2,000,000 or more; smaller lines can use one or a 1:1 collateral ratio |
| Advance rates | Up to 80% of eligible domestic receivables and 50% of eligible inventory |
| Main ineligibles | Invoices more than 90 days past due; every invoice from a customer delinquent on more than 50% of them; original terms over 180 days without letters of credit or credit insurance; affiliates; contra accounts |
| Concentration | A customer above 20% of total receivables should be excluded unless it meets a listed condition, such as credit insurance, or SBA consents |
| Field exams | Before the first disbursement and annually for lines over $1,000,000 |
| Maximum variable rate | Prime or SBA's Optional Peg Rate plus 3.0% above $350,000; plus 4.5% to 6.5% on smaller loans |
For lines run without a certificate, the SOP offers a sizing formula: divide prior-year net sales by 365 and multiply by the days in the sales cycle. With $3,600,000 in net sales and a 60-day cycle, that's about $591,800. If a line falls out of margin, the lender must immediately require a paydown or more eligible collateral. And if proceeds end up buying fixed assets, the lender must refinance that portion into a term facility, so plan equipment through business term loans instead.
When an AR line beats factoring for slow-paying customers
Both run on your receivables, and both fall under UCC Article 9, which covers a transaction that "creates a security interest in personal property" and also "a sale of accounts" (UCC 9-109(a), checked October 6, 2026). With a line, you borrow against invoices you still own. With invoice factoring, you sell them, the factor typically collects from your customer, and fees often build the longer an invoice stays open.
| Your situation | Usually the better fit |
|---|---|
| Profitable, with statements a lender can underwrite, and customers who reliably pay on net 60 | AR line, since interest runs only on what you draw |
| Losses or a short track record, but large creditworthy customers | Factoring, which leans more on your customers' credit |
| One customer far above the concentration cap | Ask whether that customer can be factored separately or the cap raised |
| No reliable monthly aging or inventory records yet | Factoring until your reporting can support a borrowing base |
For slow payers, compare both offers in total dollars over the same 60 days. Paying a line down as collections arrive lowers its cost, while a factoring fee on a net 60 invoice typically covers the whole wait. Our factoring vs line of credit comparison goes deeper.
What to have ready before you apply
Lenders size these lines off your reporting, so gather:
- Receivables and payables agings for the past several month-ends
- A customer list with terms, affiliates and any customers that are also suppliers
- An inventory listing by type and location
- Credit memo and returns history, so the lender can measure dilution
- Financial statements and any existing UCC filings
Our business loan documents checklist covers the rest.
EQ Funding routes one application to lenders in our network who compete to offer terms. Each lender sets its own advance rates and eligibility rules, and approval depends on its review of your credit and repayment ability.