Advance rate

Advance rate

The advance rate is the percentage of an asset's value that a lender will lend against it. If a lender sets an 85% advance rate on receivables, a $100 eligible invoice supports an $85 advance. The remaining 15% is the borrower's equity in the asset and the lender's buffer against loss.

Advance rates are the central lever in asset-based lending and receivables financing. The total of each eligible asset's value multiplied by its advance rate is the borrowing base: the most the borrower can draw at any time. As assets are added, paid, or become ineligible, the borrowing base moves with them.

The rate is set by how much the asset's value might fall short of expectations. Receivables from strong, diversified payers with low dilution history might get 85–90%. Inventory, which has to be sold before it becomes cash, is often 50–65%. Slower-moving or harder-to-value assets get less.

An advance rate is the inverse of a haircut. An 85% advance rate is a 15% haircut. It works in a similar way to a maximum loan-to-value ratio on a single loan, but applied across a changing pool of assets. See Self-liquidating credit for where advance rates do most of their work.