Cross-Ageing: a Worked Example

A receivables lender lends against promises to pay, and the best evidence of whether a customer will keep its next promise is how it kept the last one. An invoice well past its terms is already out of the borrowing base under the age limit. The harder question is the same customer's invoice raised last week. On paper it is current. In practice a customer that is not paying old invoices is often short of cash, disputing the goods, or moving its business elsewhere, and its newer invoices carry the same risk with less warning. Cross-ageing lets the lender act on that signal before the newer invoices have aged as well.

The rule also closes a gap. Without it, a business could keep shipping to a customer that has stopped paying, raise fresh invoices and draw against them while the old ones sit unfunded. With it, new sales to that customer fund nothing until the old balance is brought back into line.

Four drafting choices decide how hard it bites. The trigger: the share of the balance that must be past the age limit, which differs widely between agreements, and some trigger on a single invoice. The ageing basis: days from invoice date or days past due, which matters when customers are on different terms. The measure: the share of the customer's whole balance, or of its balance after credit notes and disputed amounts. And reinstatement: whether the customer's current invoices return as soon as the share falls below the trigger, or only after a period of clean payment.

The rule runs customer by customer, so a large ledger can have several customers cross-aged at once. Some agreements treat related debtors as one customer, so a late-paying subsidiary can take its parent's invoices out with it. In the United States, the national-bank supervisor's asset-based lending handbook says most loan agreements include the rule, which describes US practice. In New Zealand, Australia and the UK it is likewise a matter of contract, and the trigger is whatever the facility agreement sets.

A supplier of cleaning chemicals to the hospitality trade, constructed for this page, has a ledger of US$4.0m. Its invoice discounting facility advances 80% against eligible debtors, excludes invoices more than 90 days from invoice date, and cross-ages any customer with 30% or more of its balance past that age. The advance rate and both limits are the example's, not a market norm. Figures in US$000:

The hotel group's US$400,000 of current invoices leaves the base with its overdue ones, and availability falls by US$320,000 on a ledger that has not shrunk. A month later the hotel group pays US$150,000 of its oldest invoices and, to keep the effect visible, nothing else changes:

A payment of US$150,000 against invoices that were already unfunded lifts availability by US$320,000, because it brings the customer back under the trigger. That asymmetry is why a finance director with a cross-aged customer chases the oldest invoices first, and why a lender reading the monthly figures watches the customers that sit just either side of the line.

Three exclusions sit side by side in most eligibility schedules and are easily confused. The age limit removes individual invoices that are too old and touches nothing else. The concentration limit removes the part of one customer's balance that exceeds a set share of the whole ledger, because too much depends on one payer, however promptly it pays. Cross-ageing removes a customer's whole balance because of how it pays. A customer can trip one without the others: a large customer that pays on time meets only the cap, and a small one that pays late can be cross-aged while far below it.

Where all three apply, the order matters. Many facilities take out aged invoices first, apply cross-ageing to what is left of the affected customer, and apply the concentration cap to the eligible remainder, so that the same dollar is not excluded twice. A borrowing base certificate that runs them in a different order from the agreement can misstate availability in either direction.

DEFINED IN ONE PARAGRAPH → · ELIGIBLE RECEIVABLES → · THE CERTIFICATE THAT APPLIES IT →

At approval, the credit officer reads the aged debtors report customer by customer and asks how many would be cross-aged today and how close the largest are to the trigger. A business whose biggest customer pays late can find the facility worth much less than its headline advance rate suggests. In negotiation, the borrower argues for a higher trigger, a due-date basis, or a carve-out for a customer on long agreed terms, and the lender asks for evidence that the late payment is a habit rather than a warning. In monitoring, a customer crossing the trigger is worth a call to the borrower, because it often marks a dispute or a customer in difficulty before either reaches the accounts.

For the borrower the rule is also a forecasting problem. A business that plans its cash on the advance rate alone will be short in the month its largest customer drifts over the line. Modelling the ledger with the rule in it, at the term sheet, is how that month is seen in advance.

PRODUCT FILE: INVOICE FINANCE → · DILUTION → · UNAPPLIED CASH →