Eligible inventory: Overview, definition, and example
What is eligible inventory?
Eligible inventory refers to the stock of goods or products that meet specific criteria set by a business, financial institution, or legal agreement to qualify for certain purposes, such as financing, sales, or warranty coverage. The criteria for eligible inventory may vary depending on the terms of the agreement and can include factors such as the type of product, its condition, or its location. Eligible inventory is often used in inventory financing, where businesses can obtain loans or credit lines based on the value of their qualifying inventory.
For example, in a loan agreement, eligible inventory may include finished goods or products that are ready for sale, but not raw materials or goods in production.
Why is eligible inventory important?
Eligible inventory is important because it establishes which items can be used for specific business purposes, such as securing financing or fulfilling contractual obligations. For businesses, having a clear understanding of which inventory qualifies can streamline financial processes, reduce risk, and improve cash flow management. For lenders or investors, defining eligible inventory helps ensure that the collateral is valuable, saleable, and easily accessible in case of default.
For businesses looking for inventory-based financing, ensuring that their inventory is eligible helps them maximize their access to funds based on their stock value.
Understanding eligible inventory through an example
Imagine a retailer that has a warehouse full of products, but some of the items are damaged or unsellable. If the retailer wants to secure a loan using their inventory as collateral, the lender may specify that only certain types of products—such as new, undamaged goods—are eligible inventory for the loan. The retailer could only use these qualifying products to secure financing, leaving the damaged goods out of the calculation.
In another example, a manufacturer may use eligible inventory to determine which products are available for warranty claims. If the company offers a warranty for specific products, those products that are in good condition and within a certain age range may be deemed eligible for warranty service.
An example of an eligible inventory clause
Here’s how an eligible inventory clause might look in a contract:
“For the purposes of securing this loan, Eligible Inventory shall include only finished goods that are in good condition, free from damage, and located at the Borrower’s warehouse as of the date of this Agreement. Raw materials, work-in-progress items, and obsolete inventory shall not be considered Eligible Inventory.”
Conclusion
Eligible inventory is the stock that qualifies for specific purposes, such as securing loans, fulfilling contract terms, or meeting warranty criteria. Defining eligible inventory ensures clarity for both businesses and lenders, helping to maximize financing opportunities while minimizing risk. By clearly outlining what qualifies as eligible inventory in agreements, businesses can streamline operations and secure the necessary resources to grow.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.