Northline Industrial Supply: Building a Borrowing Base Against a Prior All-Asset Registration
Northline Industrial Supply is negotiating a $3.5 million revolving line with a new lender. Its receivables ledger is $4.2 million: $336,000 is over 90 days, $120,000 is intercompany, $90,000 relates to a customer with a right of offset for warranty credits, and the largest single account - a hardware chain - is $1.176 million. Inventory is $1.8 million at cost, including $500,000 of slow-moving SKUs with no sale in 180 days and $200,000 of work-in-progress on custom orders. The lender's standard margining is 80% on eligible receivables and 50% on eligible inventory. It excludes over-90-day, intercompany, offset and slow-moving or WIP amounts, and caps any single obligor at 25% of gross receivables. It also intends to hold a $150,000 reserve until it receives a landlord waiver. Northline's existing equipment lender holds a PPSA registration perfected in 2019 covering all present and after-acquired personal property and will not subordinate. Q3 is peak season, when receivables historically run $1.4 million above current levels.
1. Calculate gross and net availability under the lender's formula and state whether $3.5 million is supportable.
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Step 1 - ineligible receivables
- Over 90 days: $336,000
- Intercompany: $120,000
- Right of offset: $90,000
- Concentration: 25% of $4.2 million = $1,050,000; the hardware chain at $1,176,000 exceeds it by $126,000
- Total ineligible = 336 + 120 + 90 + 126 = $672,000
- Eligible AR = 4,200,000 - 672,000 = $3,528,000
- At 80%: $2,822,400
Step 2 - eligible inventory
- 1,800,000 - 500,000 slow-moving - 200,000 WIP = $1,100,000
- At 50%: $550,000
Step 3 - availability
- Gross availability = 2,822,400 + 550,000 = $3,372,400
- Less landlord reserve of $150,000 = $3,222,400
Conclusion: $3.5 million is not supportable today. The facility should be sized at $3.2 million, and even that assumes the reserve is released once the waiver is obtained. At peak, receivables rise $1.4 million - if the incremental AR is largely eligible, availability increases by roughly $1.1 million, which is when a seasonal accordion is genuinely useful. Structure it as a $3.2 million committed line with a $4.5 million seasonal increase, not a flat $3.5 million.
2. The existing equipment lender has a PPSA registration over all present and after-acquired personal property and refuses to subordinate. How does that affect the deal, and what are your options?
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It is probably fatal to the deal as proposed. A 2019 registration over all present and after-acquired personal property covers receivables and inventory, not just the equipment it financed. Unless that registration is limited or discharged, the equipment lender has first priority over the very collateral the new line depends on. Search the registry and read the registration and the underlying security agreement before anything else - registrations are frequently broader than the loan they secure.
Options, best to worst:
- Pay out and discharge. Obtain a payoff statement, use the new facility to retire the equipment loan, and require a discharge of the registration as a condition precedent to the first advance. Cleanest outcome and often cheaper than it looks on a $4.0 million-equivalent term loan.
- Partial discharge or collateral release. Ask the equipment lender to discharge or release its interest in receivables and inventory while retaining the equipment. It has said it will not subordinate, but a release of specific collateral is a different ask and sometimes easier to obtain, especially if the loan is well secured by the equipment itself.
- Intercreditor agreement. If the equipment lender will agree to a standstill and to apply receivables proceeds first to the new lender, the deal is bankable - but a refusal to subordinate suggests this will fail.
- Proceed in second position. Not acceptable for a borrowing-base line. A lender funding 80% of receivables behind an all-asset first charge has no effective remedy on default.
Also obtain a PPSA search from every prior jurisdiction, a tax clearance, and a landlord waiver - the $150,000 reserve exists precisely because that waiver has not been delivered.
3. Northline argues the 25% concentration cap is unfair because the hardware chain is its best payer. How would you respond, and what could legitimately increase availability?
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On the concentration cap. The cap is not a judgment about payment behaviour; it is a limit on single-name loss. If the hardware chain fails or enters a restructuring, Northline loses both its largest receivable and most of its sales simultaneously - a correlation the lender cannot diversify away. The relevant evidence: the account is $1.176 million, or 28% of the ledger, against a 25% cap. Even a strong payer can be downgraded or put on extended terms overnight. The cap is negotiable to 30% with credit insurance naming the lender as loss payee, or with a field examination supporting the payment history; it should not simply be waived.
Legitimate ways to increase availability:
- Eliminate the causes of ineligibility. Resolve the $90,000 offset by obtaining a written waiver of the warranty-offset right. Collect or write off the $336,000 over-90 bucket - it is dead weight in the formula and probably already impaired.
- Kill the reserve. Deliver the landlord waiver and the $150,000 comes back.
- Move the WIP. Convert the $200,000 of custom WIP to finished, shippable goods with firm orders, and it becomes eligible at 50%.
- Liquidate slow-moving stock. $500,000 sitting 180 days with no sale is not collateral; it is a write-down waiting to happen. Clearing it at a discount may cost less than the 50% margin it would earn.
- Change the mix, not the formula. Raising the share of receivables from fast-paying, diversified accounts improves both availability and the concentration position.
Present it to Northline as a roadmap: each item is a specific action that converts ineligible collateral into cash or availability, and most of them improve the balance sheet regardless of the financing.