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Haircut
Also called discount, collateral discount, advance discount.
The reduction a lender applies to a stated value before lending against it — the gap between what an asset is said to be worth and what the lender will actually treat it as worth.
Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.
What it means
Every secured lender writes down the numbers you give them. Inventory at cost becomes inventory at liquidation value. A receivables ledger becomes eligible receivables. Deposits become adjusted deposits. That write-down is the haircut, and it exists because the lender's recovery in a bad outcome is never the accounting value.
The size of the haircut tracks how fast and how completely the asset converts to cash under pressure. Government receivables from a creditworthy agency take a small one. Work-in-progress inventory in a niche industry takes a large one, because nobody else wants it.
Where the word gets used loosely
Three different things all get called a haircut:
- Underwriting haircut — the discount applied when sizing an advance or borrowing base
- Settlement haircut — the amount a creditor writes off in a workout, as in "they took a haircut on the balance"
- Fee-like haircut — informal use for money deducted at funding, which is really an origination or holdback item, not a haircut at all
Only the first is a real underwriting term.
Where this one catches people
A haircut is not a charge. Nothing is deducted from what you receive because of it; it reduces what you are offered in the first place. Merchants told their inventory took a 60% haircut sometimes ask where the money went. It never existed — the lender simply declined to lend against that portion of the stated value.
Worked through
Illustrative. A borrowing base contains $400,000 of receivables. The lender excludes $60,000 as ineligible — past 90 days, one affiliate invoice, one foreign debtor — leaving $340,000 eligible. It then applies an 80% advance rate.
Availability = $340,000 × 0.80 = $272,000. The total haircut against the stated ledger is $128,000, or 32%, of which part is eligibility and part is the advance rate.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Haircut — common questions
What does haircut mean?
The reduction a lender applies to a stated value before lending against it — the gap between what an asset is said to be worth and what the lender will actually treat it as worth.
Where does haircut catch people out?
A haircut is not a charge. Nothing is deducted from what you receive because of it; it reduces what you are offered in the first place. Merchants told their inventory took a 60% haircut sometimes ask where the money went. It never existed — the lender simply declined to lend against that portion of the stated value.
Is haircut the same as an interest rate?
Haircut is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does haircut apply to?
Business Line of Credit, Equipment Financing, Invoice Financing, Asset-Based Lending.
Is there a worked example of haircut?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside haircut?
Advance rate, Borrowing base, Collateral, Ineligible receivables, Liquidation value.
Has this definition been checked?
Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.