Advance Rate
Definition
An advance rate is the percentage of an asset's assessed value that a lender will actually lend against, converting collateral quality into a realistic borrowing limit. It is the discipline at the heart of advance rate lending: the gap between the asset's value and the amount advanced is the lender's cushion against realisation shortfalls, disposal costs and the time it takes to sell on default. Advance rates vary by asset class and quality. In asset-based lending, indicative ranges are receivables at 70 to 90 per cent, inventory at around 40 to 65 per cent of cost or up to 80 to 90 per cent of net orderly liquidation value, and plant and equipment at roughly 50 to 80 per cent of orderly-liquidation value. Intangibles sit at the cautious end. In broader-market IP lending, loan-to-values of around 20 to 40 per cent are common, rising towards 50 per cent where the exposure is insurance-backed; NatWest's High Growth IP Loan, for instance, advances up to around half of appraised IP value, revalued annually by an independent valuer. The advance rate on IP reflects the blended view of separability, saleability and legal strength applied to an orderly-disposal value, so registered rights with clean, unencumbered title and paid renewals support a higher rate than unregistered or contested ones. A UK example: an SME with £2m of appraised patents and trade marks might see an advance in the low-to-mid hundreds of thousands as an IP element within a wider facility, the conservative rate reflecting the illiquidity of the rights. These figures are indicative of general practice, not guarantees. The advance rate matters because it directly determines availability within the borrowing base and, together with operating cash flow serviceability, keeps the facility prudently sized and defensible if the borrower defaults.
Complementary Terms
Concepts that frequently appear alongside Advance Rate in practice.
The borrowing base is the amount a lender will make available against a borrower's collateral, calculated as eligible collateral multiplied by its advance rate, less ineligibles and reserves. It is the central mechanic of asset-based lending: rather than fixing a loan amount up front, the facility flexes with the value of the underlying assets, so availability rises and falls as receivables, inventory and other collateral change.
Net orderly liquidation value is the orderly liquidation value of an asset less the direct costs of realising it, giving the amount a lender would expect to net after a controlled disposal. It strips out disposal expenses such as agent and legal fees, marketing costs, storage, and any taxes or commissions, leaving the figure that would actually reach the secured creditor.
Collateral ineligibles are items a lender excludes from the borrowing base because they fail its eligibility criteria, so they generate no borrowing availability. In an asset-based facility, availability is calculated by applying an advance rate to eligible collateral, then deducting collateral ineligibles and any reserves.
An overadvance is a drawing that exceeds the amount the borrowing base would normally support, so the borrower is advanced more than the eligible collateral, at applicable advance rates and net of ineligibles and reserves, would justify. In asset-based lending, availability is calculated from the collateral, and an overadvance temporarily breaks that link.
An asset-based lending reserve is an amount a lender withholds from the borrowing base to cover specific risks or contingencies, reducing the funds a borrower can draw. In an asset-based facility, availability is built up as eligible collateral multiplied by an advance rate, less collateral ineligibles, less reserves.
A borrowing base certificate is the periodic statement a borrower submits to its lender reporting the current value of eligible collateral, from which available borrowing capacity is calculated. It is the operational document that keeps an asset-based facility honest between formal reviews: the borrower lists receivables, inventory and any other qualifying collateral, applies the agreed advance rates, deducts ineligibles and reserves, and arrives at the availability figure the lender relies on to permit further drawings.
A field examination is a lender's on-site verification of a borrower's collateral and reported financial figures, carried out before funding and periodically through the life of an asset-based facility. Field examination lending practice exists because availability in an asset-based facility depends on the accuracy of the numbers a borrower reports, and a lender will not simply take those figures on trust.
Saleability is how readily an intangible asset could be sold or licensed to realise cash, particularly on a default when a lender must dispose of security within a constrained timeframe. Where separability asks whether an asset can be detached from the business at all, the saleability of an intangible asset asks the harder market question: is there an identifiable pool of buyers, a functioning secondary market, and a realistic prospect of achieving value within an orderly-disposal window rather than a distressed fire sale.
Related FAQ
What is IP-backed insurance and does it help me borrow more?
IP-backed insurance guarantees a minimum recovery value on your intellectual property if you default, reducing the lender's loss given default. It can lift advance rates towards roughly 50%.
Read full answer →What is a borrowing base and how does it work?
A borrowing base is the amount you can borrow against pledged assets. It is eligible collateral multiplied by an advance rate, less ineligibles and reserves, giving your available facility.
Read full answer →Do registered IP rights get better loan terms than unregistered?
Yes. Registered rights such as patents, trade marks and registered designs carry more weight than unregistered IP, supporting higher advance rates because title and enforceability are easier to prove.
Read full answer →Put this knowledge to work
Use Opagio's free tools to measure and grow the intangible assets that drive your business value.