Should I borrow against inventory or receivables?

A receivable is a legal claim against a third party for a stated amount on a stated date. Inventory is an asset whose value depends on someone deciding to buy it, at a price you do not control, in a timeframe nobody will guarantee. Lenders price that difference, and they price it hard: eligible receivables commonly support advance rates in the eighties, inventory a fraction of a discounted appraisal value.

Everything else — the cost, the monitoring, the reporting — follows from that single gap in certainty.

What each actually produces

$400,000 of receivables produced $299,200. $600,000 of inventory produced $149,600. Same borrower, same borrowing base, twice the collateral value, half the money.

Where receivables win

Almost always, when you have them. Higher advance rate, no appraisal cost, no periodic re-appraisal, faster reporting, and a collateral pool that converts to cash on its own without any action from you.

The cost side compounds the advantage. Inventory lending carries an appraisal at the outset and usually annually thereafter, plus field examinations at your expense, plus more intensive reporting. Those are real dollars that never appear in the rate.

Where inventory wins

Everything above the limit becomes ineligible: $148,000 falls out, leaving $252,000 eligible and $214,200 of availability. You have lost $85,000 of borrowing power to a customer you were pleased to win.

Now inventory earns its keep. Capped at half of the receivable availability, it adds $107,100, bringing the total to $321,300 — more than the receivables produced on their own in the unconcentrated case.

The other clear case needs no arithmetic: a retailer, a restaurant, a consumer-facing business has no receivables at all. Inventory, equipment and card receipts are the only collateral in the building, and the question answers itself.

The definitions that decide your availability

Your borrowing base is not built from your balance sheet. It is built from the lender's definitions, and those definitions are negotiable before signing and immovable afterwards.

On the inventory side the equivalents are the appraisal basis, what categories are excluded — work in progress, slow-moving stock, packaging, consigned goods — and how often the appraisal is refreshed.

The prices are not on one measure

A receivables facility is usually priced as interest on the drawn balance plus a servicing or collateral management fee. An inventory facility adds appraisal and examination costs that are charged whether or not you draw. Comparing the two on the interest rate alone understates the inventory facility, sometimes substantially.

Ask for a twelve-month all-in cost estimate on each, at your expected average utilisation, including every examination and appraisal.

The questions that settle it

1. What is my largest customer as a percentage of the ledger, and what is the proposed concentration limit? Run the arithmetic before you sign. This single number often moves availability more than the advance rate does.
2. What is my dilution rate? Credit notes and returns over the last twelve months, as a percentage of sales. High dilution means a lower advance rate and you should know your number before the lender tells you theirs.
3. What does the appraisal say my inventory is worth on a liquidation basis? If you have never had one done, assume it is far below cost.
4. What are the monitoring costs in dollars for the first year? Appraisals, field exams, reporting, audits.

What to have ready, and what to refuse

Have a current aged receivables report and an aged payables report, an inventory listing by category with cost and age, and twelve months of credit notes. Those four documents produce a realistic availability estimate before anyone runs a process.

Ask for a sample borrowing base certificate with your own numbers filled in. It shows exactly what you would be able to draw, and it takes a lender ten minutes to produce.

Refuse to sign a facility whose headline limit is much larger than your calculated availability — the limit is marketing and the borrowing base is the money. Refuse to accept standard eligibility definitions without checking them against your ledger. And refuse an inventory facility until someone has told you the total annual monitoring cost as a dollar figure.