Common Mistakes and How to Avoid Them

A first facility can stall for reasons that have nothing to do with credit. The book performs, the provider stays engaged, and the process still slips because somebody sized equity off the wrong denominator or discovered a consent requirement days before signing. The failures below recur often enough to be worth checking for, and each is cheaper to prevent than to discover late.

Assume throughout this page a fictional originator whose entire pool is financed by one facility plus its own equity, which buys assets at par, holds no reserves and has no debt elsewhere. The arithmetic changes if any of that is untrue.

Sizing equity off the whole pool instead of eligible collateral

This modelling error understates the equity requirement by an amount large enough to break a funding plan.

The USD 2m of ineligible receivables receives no advance under this facility. In the fictional case above, where no other funding exists, that USD 2m is funded from equity. Add the USD 2.5m of equity required against the eligible portion and the total is USD 4.5m before any transaction costs, not the USD 3.0m the shortcut suggests. In practice, ineligible assets may instead be funded under a second facility, sold to another buyer, or left unoriginated, so the response to a rising ineligible share is a financing decision rather than a fixed outcome. Plan against the wrong figure, though, and you can run short of equity partway through your origination year with fewer of those options open.

Build the funding model with an eligibility column from the start, and refresh the eligible balance monthly. Ineligibility can reflect credit judgements, documentation and structural tests, or a combination, so a receivable may be performing perfectly and still fail an eligibility test on tenor, concentration or missing paperwork. That share moves as your product mix and vintage profile change.

Treating the commitment as available cash

A commitment is a ceiling, not a balance. What you can borrow at any moment is set by the borrowing base, capped by the commitment, and conditioned on the draw requirements in the documents. A warehouse with a large headline number and a thin eligible pool supports very little borrowing and, if an unused fee applies, generates cost while doing it.

Maintain a rolling forecast of eligible balances alongside the commitment, month by month for at least a year. Size the commitment against the peak of that forecast plus a working buffer, then revisit it when your product mix changes rather than when you next need to draw.

Optimising the margin and missing the all-in cost

Margin negotiations absorb time out of proportion to their effect. Build a total cost schedule covering the reference rate and margin, upfront and structuring amounts, unused fees, agency and administration charges, legal costs on both sides, audits or field examinations, backup servicing, account bank charges, and the internal headcount your reporting obligations require. The categories and how they interact are set out in facility fees.

Run that schedule against realistic utilisation rather than full drawdown. A facility priced tightly but sized well above your eligible book can cost more in practice than a wider margin on a right-sized commitment.

Mixed as-of dates across the file

A tape struck at month end and a delinquency report run a week later will generate questions that have nothing to do with your credit. Publish one cutoff for the portfolio extracts, refresh those extracts together, and record the generation time and source system for each. Documents with their own natural dates, such as audited accounts, executed contracts and bank statements, should carry the period they genuinely cover rather than be forced onto the portfolio cutoff. The full approach is set out in preparing your data room.

The same discipline applies after closing. Monthly reporting packs assembled from extracts taken on different days produce covenant calculations that cannot be reproduced, and irreproducible calculations attract scrutiny you do not want.

Consents and assignment restrictions found late

Your origination platform agreements, servicing contracts, data licences, merchant or dealer arrangements and existing funding documents may restrict transfer, require notice, or require consent before receivables move to a financing vehicle. Most such restrictions are manageable with time. Some are not: a counterparty that refuses consent, or a prohibition with no workaround, can block the transaction outright rather than merely delay it. Either way, obtaining a third-party consent runs on the counterparty's timetable, not yours, so late discovery removes the option of finding another route.

Inventory every material contract at the start of the process, route the transfer and assignment provisions to counsel, and maintain a register with a consent status column. What each restriction actually requires is a legal question specific to the wording and governing law, so get the answer from counsel rather than from a reading of the clause over coffee.

Concentration hiding inside an average

Average exposure figures conceal concentration almost by construction. In a hypothetical book with a USD 8,000 average obligor exposure, the top ten obligors could still account for a fifth of eligible collateral without the average moving at all. Concentration also arrives through dimensions people forget to measure: a single merchant or dealer channel, one metropolitan area, one vintage quarter, one product variant that grew quickly.

Run your own concentration report before the provider runs theirs, covering obligor, channel, geography, vintage and tenor, and look at your forecast as well as your current position. Caps that sit comfortably today can bind precisely when your growth plan depends on the segment that is growing. Understanding how the caps operate under the offered eligibility criteria is part of the availability analysis you do at term sheet stage.

Operations understaffed at exactly the wrong moment

A live facility generates recurring work: borrowing base certificates, reconciliations, monthly reporting packs, covenant calculations, audit responses, backup servicer file testing. That work has deadlines, and the deadlines do not move when your one qualified person is on leave or has resigned.

Name a primary owner and a deputy for every recurring deliverable, and test the deputy at least once by having them produce the pack. Rehearse the backup servicing file transfer rather than assuming a monthly file transmission proves anything, since a common finding is that fields cannot be imported in the form supplied. Run that rehearsal through the agreed secure channel with the recipient's authorised contacts and the same masking and access controls you use elsewhere, rather than sending a full unmasked extract to whoever asks for it. What the ongoing obligations look like in practice is covered in servicing requirements and reporting and compliance.

Trapped cash counted as distributable

Cash collected, profit recognised and cash you can actually distribute are three different measures, and conflating them is what produces distributions you cannot fund.

Collections mix principal and interest. Principal receipts are a return of capital and are not income however freely you can use them. Interest receipts may be recognised as income under your accounting policy even while the cash sits in a blocked account, because recognition follows the accounting basis rather than whether the cash is available. So a trigger that traps cash does not convert income into non-income, and it does not tell you whether the period was profitable. What it changes is liquidity: money the waterfall directs to reserves, principal repayment or trapped balances is not available for distribution, whatever the income statement says.

Split your reporting into three views. Collections by type, showing principal, interest and fees. Recognised profit on your stated accounting basis. Distributable cash, reconciled to bank statements and split between collection accounts, restricted reserves and genuinely free balances. Read both the normal application order and any alternative ordering that applies after a trigger, since the waterfall governing a stressed month may not be the one you modelled.

A prevention checklist with owners

Assign each item to a person, not a function, and check the evidence exists rather than trusting that the step was taken.

Work through the list once before you open a data room and again a month before target signing. The second pass matters more, because the commitments made during documentation change the answers to several of these items, and the change is easy to miss when everyone is focused on closing. The negotiation decisions that sit behind half of this list are covered in term sheet negotiation.