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Asset-Based Lending Glossary of Terms

Accounts Receivable - Money owed a business for merchandise or services bought on open account. Accounts receivable arise from the business practice of providing a customer merchandise or a service with the expectation of receiving payment per specified terms.

Advance - A drawdown or disbursement of funds according to the terms of an existing loan agreement.

Advance Rate - The maximum percentage that the lender will lend against a type of collateral.

Aging (Schedule) - A periodic report listing a borrower’s accounts receivable or payable balances, by customer or supplier, detailing the current status or delinquency of the balances owed or owing. Such reports are usually used in determining the borrower’s compliance with the borrowing base requirements in the loan agreement.

Asset-Based Lending - A specialized form of secured lending whereby a company uses its current assets (accounts receivable and inventory) as collateral for a loan.

Availability - The additional funds that the lender will advance under the terms of the credit facility. The amount is often the difference between the loan commitment amount and the outstanding balance of the credit facility..

Blanket Assignment - An agreement giving the lender a security interest in all of assets owned by the borrower.

Borrowing Base - A collateral base, agreed to by the borrower and lender, which is used to limit the amount of funds the lender will advance the borrower. The borrowing base specifies the maximum amount that can be borrowed in terms of collateral type, eligibility, and advance rates.

Compliance Certifications - The borrower’s statement certifying its adherence to the terms of the loan agreement during the stated period. Credit Memo - A detailed memorandum forwarded from one party or firm to another granting credit for returned merchandise, some omission, overpayment, or other cause.

Cross-Collateralized - In the event of default, the collateral of cross-collateralized loans is used to satisfy the debts.

Cross Default - The right to declare a loan in default if an event of default occurs in another loan.

Debtor-in-Possession (DIP) Financing - Financing provided to a borrower after a chapter 11 (reorganization) bankruptcy filing. A lender provides the DIP post-petition financing to support its working capital needs while the DIP attempts to rehabilitate its financial condition and emerge from bankruptcy protection.

Eligible Collateral - A defined term in the loan agreement that controls what collateral can be included in the borrowing base.

Factoring - An arrangement in which a company shortens its cash cycle by selling its accounts receivable without recourse to a third party, known as a “factor.” A factor assumes the full risk of collection, including credit losses. There are two basic types of factoring: (1) discount factoring, in which the factor discounts the receivables prior to the maturity date, and (2) maturity factoring, in which the factor pays the client the purchase price of the factored accounts at maturity.

Formula - A calculation to determine the borrowing base in which a margin or advance rate is applied to each type of collateral.

Ineligible Collateral - Pledged receivables or inventory that does not meet the criteria specified in the loan agreement. Ineligible collateral remains part of the ABL lender’s collateral pool, but does not qualify for inclusion in the borrowing base.

Lien - A legal right granted by the authority of a court to control or to enforce a charge against another’s property until some legal claim is paid or otherwise satisfied.

Liquidation Value - The most likely price an asset will bring if it is sold without reasonable market exposure and when the seller is under duress.

Lock Box - A cash management product offered by financial institutions that accelerates a client’s collection of receivables.

Non-notification - The bank does not notify the borrower’s pledged accounts that they are to remit payments directly to the bank. Non-notification often involves a lock box arrangement. The bank may also allow the borrower to collect payments and remit them to the bank for credit against the loan balance.

Notification - The bank notifies a borrower’s pledged accounts that they are to remit payments directly to the bank for collection.

Operating Cycle - The period of time it takes a business to convert purchased and manufactured goods and services into sales, plus the time to collect the cash from the associated sales.

Pari Passu - Credit facilities in which two or more lenders are accorded equal treatment under a loan agreement. Most frequently applied to collateral, but may also refer to loan structure, documentation, maturity, or any other substantive condition.

Purchase Money Security Interest (PMSI) - The Uniform Commercial Code (UCC) prescribes that if a creditor provides financing for a debtor to acquire specific goods, the creditor can perfect a security interest in the goods despite the existence of financing statements on similarly described collateral.

Revolving Credit Facility - A loan agreement that allows the borrower to frequently draw down and repay advances. The proceeds are usually used to support the working capital needs of the borrower.

Security Agreement - A document giving a lender a security interest in assets pledged as collateral. This agreement, signed by the borrower, describes the collateral and its location in sufficient detail so the lender can identify it, and assigns to the lender the right to sell or dispose of the assigned collateral if the borrower is unable to pay the obligation.

Set-off - A common law right of a lender to seize deposits owned by a debtor and deposited in the lender’s institution for nonpayment of an obligation.

Uniform Commercial Code (UCC) - A model framework of laws that addresses commercial transactions.

Working Investment - The result of calculating the sum of accounts receivable and inventory, minus the sum of accounts payable and accrued expenses (excluding taxes). It represents the amount of financing and trade support that a company needs to fund its trading assets.