A steel trader seeks an asset-based loan against receivables, inventory and machinery, with aged debts, one oversized customer and slow-moving stock. Compute the borrowing base and say how much you would lend.

The borrowing base is about Rs 363 crore, Rs 37 crore short of the Rs 400 crore request. Eligible receivables are Rs 239 crore after aged debts and the concentration cap, eligible inventory Rs 200 crore and machinery Rs 100 crore. At 85%, 60% and 40% they support Rs 203.15, 120 and 40 crore. I would offer a revolving line of about Rs 323 crore against receivables and stock, tested monthly, with the machinery piece as a separate amortising term loan of Rs 40 crore.

A pawnbroker does not lend against everything in your house; he lends against the gold he can sell tomorrow, and less than its full value. An asset-based loanA loan, usually revolving, whose size is set each month by the value of specific collateral, mostly receivables and inventory, rather than by a multiple of earnings. is sized by collateral the lender could collect or sell quickly if the borrower failed, so the first step is deciding which collateral counts at all. The rules that decide this are eligibility criteria, and they differ by class: receivables lose aged and concentrated balances, inventory loses stock that does not sell, and machinery is valued at what an orderly sale would fetch, not what it cost. Only then do the advance rates apply, and the result is the borrowing baseThe maximum the borrower can draw at a given date: eligible collateral in each class times its advance rate, less any reserves..

Receivables more than 90 days old are excluded because a customer who has not paid in three months may not pay at all: that removes Rs 40 crore, leaving Rs 260 crore. The concentration cap stops one customer's failure from sinking the collateral: 15% of Rs 260 crore is Rs 39 crore, so Rs 21 crore of the big customer's Rs 60 crore is excluded. Eligible receivables are Rs 239 crore of the Rs 300 crore on the books. In inventory, the Rs 50 crore that has not moved in six months is out, because steel that has sat for half a year will sell only at a deep discount; eligible inventory is Rs 200 crore. The machinery is already at orderly liquidation value, so all Rs 100 crore counts before its advance rate.

Not Rs 400 crore. Offer a revolving line sized to the working capital base, about Rs 323 crore, with availability recalculated every month from a borrowing base certificate, and treat the Rs 40 crore against machinery as a separate term loan that amortises over a few years. Machinery does not turn into cash in the normal course of business the way receivables and steel do, so lending against it on a revolving basis lets a declining asset support a permanent loan. If Lohadhara needs more, it has two routes the lender can accept: insure the big customer's balance, which could make the Rs 21 crore excess eligible and add about Rs 18 crore, or clear the slow stock and the aged debts, which lifts eligibility as they convert to cash.

State the limits. Some lenders apply the concentration cap to the eligible pool after the excess itself is removed, which gives a slightly tighter answer, an excess of about Rs 24.7 crore and a base of about Rs 360 crore. A lender would also hold reserves for credit notes and returns, which dilute receivables, and would value inventory at what it would fetch in an orderly sale rather than at cost, so the working base is likely a little lower still. And the base is a monthly number: in a steel downturn prices fall, stock values with them, and customers pay later, so availability shrinks exactly when the trader needs it most, which is the point of an asset-based structure and the reason the lender is comfortable.