Obsolete inventory can reduce your borrowing capacity under asset-based lending (ABL) because lenders may exclude outdated, damaged, discontinued, or difficult-to-sell stock from the borrowing base. When inventory is no longer marketable, it may provide little or no support for a loan. As a result, a business can carry substantial inventory on its balance sheet but have access to much less financing than expected.
For manufacturers, distributors, and other inventory-heavy businesses, understanding how lenders evaluate stock is important for managing working capital and maintaining access to financing.
How Is the Borrowing Base Calculated?
An asset-based lending facility is a type of business financing secured by eligible assets, such as accounts receivable, inventory, and sometimes equipment. In a revolving facility, the amount a business can borrow depends partly on the value of its eligible collateral. This calculation is known as the borrowing base.
Lenders typically apply advance rates to eligible assets rather than lending against their entire recorded value. Eligible accounts receivable may support a higher advance rate than inventory, while inventory is often valued more conservatively because it can take longer to sell.
For inventory, lenders may use an appraisal to estimate its net orderly liquidation value (NOLV), which represents the estimated proceeds from selling the inventory in an orderly liquidation. The lender then applies its agreed advance rate and deducts any applicable reserves or other adjustments.
The amount available to borrow therefore depends on more than the total value of the assets a business owns. It also depends on whether those assets meet the lender’s eligibility requirements and how much value the lender believes they can recover.
For more information, see our guide to how asset-based lending works for growing businesses.
What Does Obsolete Inventory Do to Your Borrowing Availability?
Obsolete inventory can affect borrowing availability in several ways.
First, it may be excluded from the borrowing base. Lenders commonly establish eligibility requirements for discontinued, damaged, expired, or slow-moving inventory. Stock that does not meet these requirements may receive no borrowing-base value.
Second, it can affect inventory valuation. When a significant portion of a company’s stock is difficult to sell, the lender or appraiser may take a more conservative view of its marketability and liquidation value. The effect on other inventory depends on the appraisal and the lender’s assessment.
Third, it may lead to additional reserves or restrictions. If inventory reports reveal persistent aging, weak turnover, or valuation concerns, a lender may review its eligibility rules, reserves, or inventory sublimits in accordance with the financing agreement.
Example: How Obsolete Inventory Can Reduce Borrowing Capacity
Consider a business with $2 million in inventory recorded at cost. For this simplified illustration, assume the inventory has an estimated net orderly liquidation value equal to 70% of cost and the lender applies an 85% advance rate to that value.
The calculation would be:
- Inventory at cost: $2,000,000
- Assumed liquidation value: $1,400,000
- Advance rate: 85%
- Illustrative borrowing-base value: $1,190,000
Now suppose $400,000 of the inventory is obsolete and excluded from eligible inventory. If the remaining $1.6 million retains the same assumed valuation and advance rate, the calculation becomes:
- Eligible inventory at cost: $1,600,000
- Assumed liquidation value: $1,120,000
- Advance rate: 85%
- Illustrative borrowing-base value: $952,000
In this example, excluding obsolete inventory reduces the borrowing-base contribution by $238,000.
These figures are illustrative, not a lending quote. Actual availability depends on the lender’s appraisal, eligibility criteria, reserves, other collateral, existing loan balances, and the terms of the facility. A reduction in borrowing-base value does not necessarily translate dollar for dollar into a reduction in available cash.
Which Inventory Counts and Which Doesn’t?
Not all inventory receives the same treatment under an asset-based lending agreement. Eligibility depends on the type, condition, marketability, ownership, and location of the stock, as well as the lender’s policies.
| Inventory type | Typical lender treatment |
| Current finished goods | May qualify if they are marketable and meet eligibility requirements |
| Raw materials | May qualify, depending on their condition, marketability, and the lender’s criteria |
| Slow-moving stock | May be discounted or excluded based on aging and sales history |
| Obsolete, discontinued, damaged, or expired inventory | Often excluded or assigned limited value |
| Consigned inventory | May be ineligible if the borrower does not own it outright |
| Inventory held at third-party locations | Eligibility may depend on access, control, documentation, and contractual arrangements |
These are general examples, not universal rules. The applicable loan agreement determines which inventory qualifies and how it is valued.
Lenders may also examine the accuracy of inventory records, stock counts, turnover reports, and valuation methods. Learn more in our article on red flags that can disqualify you from an asset-based loan.
Why Do Lenders Pay Close Attention to Old Inventory?
The value of inventory as collateral depends partly on whether it can be sold and how much a lender could recover from it if the borrower defaults.
Products that are outdated, damaged, or no longer in demand may have limited resale value. Even if these goods remain recorded as assets in the company’s accounts, a lender may assign them a much lower value or exclude them from the borrowing base.
There can also be a difference between a company’s accounting records and the lender’s collateral assessment. Inventory may remain on the balance sheet at its recorded value until the business recognizes an appropriate write-down. Meanwhile, the lender may assess the same stock based on its condition, demand, and potential liquidation proceeds.
This difference can create unexpected financing pressure, especially when a business relies on its borrowing facility to cover payroll, supplier payments, or operating expenses.
Seasonality also matters. Products that sell slowly during one part of the year may still have strong demand during their normal selling season. Lenders may consider these circumstances when evaluating inventory, but the treatment depends on the agreement and the supporting evidence.
If inventory exclusions or other adjustments reduce the borrowing base below the outstanding loan balance, the borrower may have to address the resulting shortfall under the facility’s terms.
For a broader explanation of how lenders assess collateral, read our article on the role of collateral in asset-based lending.
How Businesses Can Protect Their Borrowing Availability
Businesses can take practical steps to identify aging stock early and reduce the risk of unexpected borrowing-base adjustments.
1. Review Inventory Aging Regularly
Prepare inventory-aging reports at the item or product-category level. Track how long stock has been held, how frequently it sells, and whether demand is changing. This helps identify products that may approach a lender’s eligibility threshold.
2. Understand Your Lender’s Eligibility Rules
Review the loan agreement to understand how the lender treats slow-moving, discontinued, damaged, seasonal, and expired goods. Ask how inventory aging is measured and what documentation is required to establish eligibility.
3. Address Aging Stock Before a Field Exam
Where practical, consider discounting slow-moving products, returning eligible goods to suppliers, or liquidating stock with limited demand. These steps may help recover cash and improve inventory turnover, although they do not guarantee an increase in borrowing availability.
4. Maintain Accurate Inventory Records
Keep clear records of stock quantities, purchase dates, lot numbers, sales history, returns, and product condition. Reliable documentation helps the lender evaluate inventory more accurately and can make the review process more efficient.
5. Improve Purchasing and Inventory Planning
Use actual sales trends and demand forecasts to guide purchasing decisions. Review reorder points, supplier return policies, and slow-moving product categories to reduce the risk of accumulating stock that may become difficult to sell.
6. Plan for Changes in Borrowing Availability
Include potential inventory exclusions and valuation adjustments in cash-flow forecasts. This helps the business prepare for changes in available credit and reduces the risk of relying on funds that may not remain accessible.
How Asset-Based Lending Can Support Business Financing Needs
For businesses with significant eligible assets, asset-based lending can provide access to working capital using collateral such as accounts receivable, inventory, and equipment. However, the amount available depends on the quality and eligibility of those assets, the lender’s underwriting process, and the terms of the financing agreement.
State Financial works with manufacturers, distributors, and service providers seeking financing solutions tailored to their business circumstances. If aging inventory is affecting your borrowing plans, reviewing your overall collateral position may help you understand which assets can support financing.
Explore State Financial’s asset-based lending solutions to learn more about financing options for eligible businesses.
Final Thoughts
Obsolete inventory can reduce asset-based lending capacity because lenders focus on the value of eligible collateral, not simply the total inventory shown on a company’s balance sheet. Stock that is outdated, damaged, or difficult to sell may contribute little or nothing to the borrowing base.
Businesses can reduce surprises by monitoring inventory aging, understanding lender eligibility rules, maintaining reliable records, and improving purchasing decisions. Regularly reviewing the borrowing base alongside cash-flow forecasts can also help business owners prepare for changes in financing availability.
For companies exploring asset-based lending, understanding how inventory is valued is an important step toward making informed financing decisions. State Financial can help eligible businesses explore asset-based financing options based on their collateral and business needs.
Frequently Asked Questions
What is asset-based lending, and how does it work?
Asset-based lending is a form of business financing secured by assets such as accounts receivable, inventory, and sometimes equipment. In a revolving facility, the lender calculates a borrowing base using eligible collateral and agreed advance rates. The amount available to draw can change as asset values, eligibility, reserves, and outstanding balances change.
Can selling or writing off obsolete inventory restore borrowing availability?
Not automatically. Selling obsolete inventory may generate cash that can be used to repay outstanding debt, while a qualifying credit sale may create a receivable that could become eligible collateral. Writing down inventory can align accounting records with its estimated value, but the write-down itself does not create additional collateral or guarantee greater availability.
Can a small business qualify for asset-based lending if its inventory is aging?
Potentially, yes. Eligibility depends on the business’s overall financial position, the quality of its collateral, its reporting practices, and the lender’s underwriting requirements. Strong eligible accounts receivable or other assets may help support a facility even when some inventory is slow-moving. However, aging inventory can reduce borrowing availability or lead to additional restrictions.
Do asset-based lenders monitor inventory?
Many lenders require inventory reports and may conduct field examinations, inventory audits, or appraisals, depending on the facility. These reviews help assess inventory quantities, condition, marketability, and eligibility. Maintaining accurate records and communicating changes in inventory promptly can help businesses manage their financing more effectively.
