Most steel service centers finance their operations with an asset-based lending (ABL) facility secured by inventory and receivables. The bank advances 60% to 80% of eligible inventory value as a revolving line of credit. The key word is "eligible." What the bank considers eligible depends heavily on how well you track your inventory.
What Banks Look At
During field audits (typically quarterly), the bank's auditor visits your warehouse and compares what your system says is there to what is actually there. They select a sample of inventory items, verify quantities and locations, and compare the system value to current market value. They also review the aging of inventory to identify slow-moving or obsolete material.
The auditor is looking for three things. Accuracy: does the system match the floor? If the system says there are 15 coils of 16-gauge CRC in Bay 4 and the auditor counts 12, you have a 20% variance. That variance reduces the auditor's confidence in your entire inventory report.
Valuation: is the inventory valued at cost or at market? If you purchased material six months ago at $45 per CWT and the current market price is $38 per CWT, the bank will value it at the lower number. Inventory held at above-market cost overstates the collateral value.
Eligibility: is the inventory saleable? Slow-moving material (no sales in 6+ months), obsolete specifications, damaged material, and material on customer hold may be excluded from the eligible base. The bank is not interested in material you cannot convert to cash.
How Inventory System Quality Affects Borrowing
A service center with 98% inventory accuracy, current market valuations, and clear identification of slow-moving items presents a clean borrowing base to the bank. The auditor spends two days, finds everything in order, and the full eligible inventory qualifies for the advance rate.
A service center with 90% inventory accuracy, stale valuations, and a pile of untracked remnants presents a different picture. The auditor finds discrepancies, questions the valuation methodology, and applies "reserves" (reductions) to the borrowing base. A 10% reserve on a $5 million eligible inventory reduces borrowing capacity by $500,000. At a 75% advance rate, that is $375,000 less available credit.
The interest rate may also be affected. Banks assess risk based on collateral quality. A service center with clean inventory data and strong controls might borrow at prime plus 1%. The same service center with poor data might pay prime plus 2.5%. On a $3 million average borrowing, that 1.5% difference is $45,000 per year in additional interest.
What Lenders Want to See
Perpetual inventory system with cycle counting. Not annual counts, but continuous verification that maintains accuracy year-round. The bank wants to know that the number you report on the borrowing base certificate each month is reliable, not just accurate on the day of the annual count.
FIFO or market valuation. Inventory valued at the lower of cost or market, with regular updates to reflect current market conditions. Stale cost-basis valuations overstate collateral value and create audit issues.
Aging reports. Inventory aged by last sale or last movement. Material that has not moved in 90, 180, or 365 days should be clearly identified and categorized. The bank excludes or discounts aged inventory from the eligible base.
Shrinkage tracking. The difference between system inventory and physical inventory, measured consistently. Lenders want to see shrinkage below 2% and trending downward. Shrinkage above 3% raises serious concerns about controls and data quality.
The Borrowing Base Certificate
Most ABL facilities require a monthly borrowing base certificate: a report showing total inventory, eligible inventory (after exclusions), the advance rate, and the resulting available credit. Producing this certificate from a modern inventory system takes minutes. Producing it from a legacy system or spreadsheet takes hours or days and involves manual adjustments that the bank may question.
Your inventory system is not just an operational tool. It is a financial instrument that directly affects your borrowing capacity, interest rate, and banking relationship. The service center that invests in inventory accuracy is simultaneously investing in financial flexibility.