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Advance Rate
Last Updated: Jun 6, 2019
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A contractual percentage that a lender is willing to lend against eligible collateral.
For A/R, the advance rate protects a lender against billed, but uncollected, accounts receivable (determined based on prior collection history). This amount of uncollected receivables is called dilution, and can include write-offs, discounts, returns, or short-pays. Advance rates on A/R are generally 80% to 85% (with a provision to institute a reserve if dilution exceeds a certain threshold). The A/R advance rate also provides a cushion for collection costs that will need to be incurred in a liquidation scenario.
For inventory, the advance rate is determined based on a discount to the Net Orderly Liquidation Value (NOLV). This is the value of inventory assigned by a third party appraiser using the assumption that it will be sold within an expedited timeframe. The NOLV is the estimated value of the inventory after all costs associated with liquidating the asset (via auction, going out of business sale, etc.) is considered. Standard advance rates on inventory can vary widely, from 25%-90%, depending on the type of inventory being financed.