Collateral Eligibility Criteria
Definition
Collateral eligibility criteria are the tests an asset must pass before it can support borrowing. They commonly exclude aged receivables, disputed invoices, affiliate balances, slow-moving inventory, assets with prior liens, nonconforming contracts, or obligors above concentration limits.
Why it matters
Eligibility criteria are where collateral quality becomes enforceable. Without clear criteria, a borrower may report collateral that looks large but is difficult to collect, legally impaired, stale, concentrated, or already pledged elsewhere. Strong eligibility rules turn collateral from a marketing claim into a monitored credit control.
Common misconceptions
- •Reported collateral and eligible collateral are not the same thing.
- •Eligibility is not just a closing condition; it should be tested throughout the life of the deal.
- •Eligibility criteria can be waived or amended, so investors should watch changes over time.
Technical details
Common exclusions
Receivable facilities often exclude invoices more than 90 days past invoice date or 60 days past due, disputed accounts, affiliate receivables, government receivables without proper assignment rights, and cross-aged obligor balances.
Inventory facilities often exclude work-in-process, obsolete inventory, consigned inventory, inventory outside approved locations, goods subject to landlord liens, and goods without adequate insurance.
Loan and receivable pools often exclude defaulted loans, modified loans, loans missing documentation, loans above LTV limits, and loans with incomplete perfection or assignment records.
Document trail
Eligibility criteria usually appear in the credit agreement, purchase agreement, security agreement, servicing agreement, or offering supplement. In marketplace deals, simplified versions may appear in credit snapshot tables.
The strongest deals define eligibility objectively and require periodic reporting that reconciles total collateral to eligible collateral.
Investor diligence
Ask for total collateral, ineligible collateral, reason codes for exclusions, and trend data.
Watch for eligibility drift: more aged receivables, more exceptions, higher customer disputes, or repeated waivers can precede borrowing base stress.