Picture this: A lender extends a $70mm “lender finance” revolving loan facility to a factoring company. Availability under the facility is governed by a borrowing base, calculated generally as 75% of eligible receivables. The eligibility criteria include the standard and customary exclusions and limitations. But that is not the issue here. The issue here concerns a much simpler, yet more fundamental, question: What is the “receivable” that is used to build the borrowing base in the first instance?
In most lender finance facilities to a factoring company, the “receivable” used to build the borrowing base is the amount advanced by the factor against receivables of its client, or the “net funds employed,” in factor-speak. The borrowing base is typically built on net funds employed to a factored client, rather than on the gross factored receivables of the factored client, because any portion of the factored receivables in excess of the net funds employed, or the “reserve,” in factor-speak, is ultimately payable back to the factored client. Said another way, even though the factoring agreement provides for a sale of the receivables from the client to the factor, the client retains the economic right to the reserve. For perspective, this is the same reason that the borrowing base for a lender finance facility to an inventory lender would not include the underlying inventory itself, but only the amounts advanced by the inventory lender against that inventory.
Yet, as a matter of practice, some lender finance facilities to factoring companies will build the borrowing base using gross factored receivables, rather than the net funds employed by the factor against those receivables.
Before we get into the potential ramifications of the “gross receivables” approach, let’s talk about why a lender might take this approach. While it could certainly be the result of a conceptual misunderstanding concerning the extent of the lender’s right to those receivables, it is often due more to practical than conceptual reasons.
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"The Mirage of Gross Receivables in Lender Finance," by James M. Cretella and Narbeh Grigorian was published in the March 2026 issue of The Secured Lender.