A business asks for a $2,000,000 line and gets approved for $1,200,000. The owner reads it as a partial vote of confidence. It is usually not a judgement at all. It is the output of a calculation, and every line of that calculation can be shown, questioned, and in several cases changed.
Why is the approved amount different from the request?
Because the request is a number the borrower wants and the approval is a number a formula produces. The formula runs off eligible collateral, advance rates, reserves, and a coverage test, and it does not consult the request at any point.
The useful response is not to negotiate the total. It is to ask for the bridge.
The bridge, line by line
The same company, $2,400,000 of gross receivables:
| Line | Amount |
|---|---|
| Gross accounts receivable | $2,400,000 |
| Less invoices over 90 days | ($180,000) |
| Less cross-aged balances | ($90,000) |
| Less concentration in excess of the cap | ($260,000) |
| Less contra accounts and offsets | ($70,000) |
| Eligible receivables | $1,800,000 |
| Advance rate at 85% | $1,530,000 |
| Less priority payable reserve | ($180,000) |
| Less dilution reserve | ($150,000) |
| Approved availability | $1,200,000 |
Eight hundred thousand dollars disappeared, and not one line of it was a decision about the borrower’s character. The full mechanics of the calculation are in borrowing base certificate.
What is cross-ageing and why did it cost me?
Cross-ageing is the rule that if some threshold share of a customer’s balance is past due, commonly 50%, then that customer’s entire balance becomes ineligible, including the current invoices.
It is why a single slow-paying account can remove far more availability than the past-due amount itself. It is also one of the more negotiable definitions in a credit agreement, and a borrower who knows the term exists can ask for the threshold or the mechanism to be adjusted.
What is a contra account?
A customer who is also a supplier. Because they could offset what they owe you against what you owe them, the lender treats your receivable from that customer as impaired up to the amount of the payable, and makes it ineligible.
Businesses are frequently unaware they have any. It is worth running the customer list against the vendor list before an application, since the answer is sometimes a large number.
What is the concentration cap doing?
Limiting how much of the eligible pool any one customer can represent, commonly somewhere between 15% and 25% depending on the customer’s credit and the industry. Anything above the cap is stripped out.
This is not about whether the customer pays. It is about what happens to the collateral if that one relationship ends, and it is covered in customer concentration.
Which of these can I actually change?
More than most borrowers assume. In rough order of effort:
- Collect the over-90 balances, or write off what is genuinely dead so it stops distorting the pool.
- Fix the contras by netting the relationships or moving the purchasing to a different vendor.
- Reduce dilution, which is a process problem and the fastest route to a better advance rate, as set out in factoring dilution.
- Clear the priority payable arrears, most often payroll tax, which restores the reserve dollar for dollar.
- Negotiate definitions, particularly the cross-age threshold and the concentration cap for your strongest customer.
- Add collateral, meaning inventory or equipment brought into the base rather than left outside it.
Was the coverage test also a constraint?
Sometimes, and if so it binds independently. A borrower can have plenty of collateral and still be capped because cash flow will not service the resulting debt, which is the two-test structure described in debt capacity and computed in DSCR, FCCR, and the coverage ratios.
Ask which constraint bound. If it was collateral, the fixes above apply. If it was coverage, no amount of collateral cleanup changes the answer and the conversation is about structure instead.
Should you take a smaller facility?
Usually yes, and then work the inputs. A facility in place with a lender who has already underwritten you is far easier to increase than a new one is to arrange, and most agreements permit an increase on evidence rather than requiring a full re-application.
What to avoid is filling the gap with a second, faster, more expensive facility, which adds a lien and a fixed obligation and frequently makes the next increase harder. The cost of that route is in revenue-based financing.
The short version
The approved number is a calculation, not a verdict. Ask for the bridge from gross receivables to availability, because every line on it is either a fixable operating problem or a negotiable definition, and borrowers who work the inputs get their increase from the lender they already have.