$10 Million of Inventory. $4.6 Million of Borrowing.

Inventory on the balance sheet is carried at cost. Inventory in a borrowing base is carried at what someone else would get for it, and the gap between those two numbers is where most borrowing capacity disappears.

Receivables are straightforward to value. A customer owes a stated amount and either pays it or does not. Inventory is a different exercise. It has to be sold, by someone with no relationship to the customers, in a timeframe not of their choosing.

So lenders do not lend against cost. Bank supervisory guidance is explicit that collateral appraisals should provide a net orderly liquidation value as the standard for valuation, not cost or retail value, and that a bank typically advances up to 65 percent of the book value of eligible inventory, or 80 percent of that liquidation value. For retail inventory specifically, the guidance describes 80 percent of liquidation value as the traditional structure, with competition pushing advance rates to 85 or 90 percent in some cases.

One retailer, four categories

Take an illustrative case. A specialty retailer carries $10.0 million of inventory at cost across a few hundred stock keeping units. An appraiser works through it category by category, because recovery rates differ enormously.

Core replenishment goods, branded, sold year-round, turning several times a year: $3.5 million at cost, valued at 72 percent.

Current season goods, still sellable but dated by spring: $3.0 million at cost, valued at 58 percent.

Private label, which no competing buyer can resell under its own brand: $1.8 million at cost, valued at 45 percent.

Aged and clearance stock, over a year old and already marked down once: $1.2 million at cost, valued at 25 percent.

Goods in transit, consigned items and display units: $500,000, ineligible entirely.

That produces a net orderly liquidation value of $5.37 million on $10.0 million of cost. At an 85 percent advance rate the loan is $4.56 million, which is 46 cents on the cost dollar.

Nothing here is a penalty. Every number reflects what the goods would realize if the lender ever had to sell them, which is the only question a borrowing base is built to answer.

The part that catches people out

The retailer plans to buy $1.0 million more inventory before the season. Where it goes changes the outcome more than the amount does.

A million dollars of aged or opportunistic buys, the kind that look attractive on margin, might appraise at 30 percent. That adds $300,000 of liquidation value and $255,000 of borrowing capacity against $1.0 million of cash out the door.

A million dollars of core replenishment goods at 72 percent adds $720,000 of value and $612,000 of capacity.

Same spend, same month. One leaves the business $745,000 lighter on cash, the other $388,000. Inventory went up by 10 percent either way, and the financial statements will not distinguish between them.

What actually moves the number

Four things determine inventory borrowing capacity, and only one of them is the advance rate everyone negotiates.

Mix. Finished goods and commodity-like raw materials receive the highest advance rates because they are easiest to sell. Work in process receives the least, and in many facilities none at all.

Age. Recovery rates fall steeply with time on hand, which is why slow stock is expensive twice: once in the cash it holds, and again in the capacity it fails to create.

Concentration and brand. Private label and exclusive goods appraise below branded equivalents, because the pool of buyers is smaller.

The appraisal itself. It is a document with assumptions in it, prepared by a firm the lender engages. Borrowers are entitled to understand the methodology, provide sell-through data by category, and correct errors. A category misclassified as seasonal rather than core, or an appraisal that uses last year’s markdown pattern, is worth real money. Appraisals are refreshed periodically and more often when performance slips, so each one is an opportunity to improve the number rather than a verdict.

Before the facility is sized

Three things are worth doing while there is still time to act on them.

Run your own category analysis before the appraiser arrives, using turn rates and realized margins rather than inventory classes from the accounting system.

Clear aged stock before the appraisal rather than after. It raises the blended recovery rate, releases cash, and removes the category that drags the average down.

And size the facility against the mix you will actually hold at the seasonal peak, not the mix on the date the appraisal happened to be performed.

How Thalos Capital Approaches This

Thalos Capital works borrower-side on asset-based lending from $50 thousand to $100 million and above, across the United States. The work starts with the collateral measured the way a lender will measure it: eligibility, category mix, liquidation recovery rates and the advance rate applied on top of them.

That produces a borrowing base the business can plan around, and it identifies where capacity is genuinely available rather than assumed. Appraisal firms and advance rates differ between sources, and on a $10 million inventory a few points of recovery rate is worth more than most spread negotiations.

The retailer in the example was not over-inventoried or badly run. It simply owned $10 million of one thing and was borrowing against $5.37 million of something else.

Most financing situations have more options than the borrower initially sees. A conversation is enough to map them. Submit your financing request at https://thaloscapital.com/contact.