What is the difference between a dilution reserve and ineligible AR?
Ineligible AR is excluded entirely from the borrowing base. A dilution reserve is a percentage deduction from the remaining eligible pool for credits, returns, discounts, and write-offs—not a category exclusion. Don Clarke lists dilution reserves after ineligibles are removed; OCC states dilution is usually expected to be 5 percent or less of receivables.
Last updated: September 12, 2026
Ineligible AR is a category exclusion; a dilution reserve is a percentage haircut
Don Clarke Enterprises says: "Even after ineligibles are removed, lenders apply a dilution reserve to the remaining eligible pool," and "Dilution reserves come off availability after ineligibles are removed." Ineligible AR never enters the eligible pool; a dilution reserve reduces availability on what remains.
Don Clarke BBC line-by-line lists the order as "Gross AR, less ineligibles, times the AR advance rate, less AR reserves, equals AR availability" — ineligibles and reserves are different BBC lines.
What OCC and LegalClarity list for dilution
The OCC Comptroller's Handbook: Asset-Based Lending restores the exact PDF wording: "Dilution varies by industry but is usually expected to be 5 percent or less of receivables." The same handbook says "Returns and allowances, disputes, bad debts, and other credit offsets create dilution."
LegalClarity states that "Lenders also build dilution reserves into their collateral valuations," and that "credits, returns, discounts, and write-offs chip away at the total before cash arrives." LegalClarity on borrowing-base certificates says "Dilution refers to the portion of a receivable that is never collected through customer payments" and that lenders "impose a separate dilution reserve that lowers the borrowing base further."
How dilution percent is measured
Don Clarke on ABL reserves lists the formula "Dilution % = (Credits + Returns + Allowances + Write-offs) / Gross Sales" over a trailing 12-month period. Don Clarke also states that if actual dilution (credit memos, returns, discounts, write-offs) exceeds a threshold -- typically 5 percent -- the lender takes an incremental reserve equal to the excess.
Filed Dilution Reserve definition (one SEC exhibit)
SEC EX-10.14 ABL credit agreement defines Dilution Reserve as "an amount sufficient to reduce the advance rate against Eligible Receivables by the extent to which Dilution is in excess of 5%."
| Claim | Listed | URL |
|---|---|---|
| OCC expected dilution range | Dilution varies by industry but is usually expected to be 5 percent or less of receivables. | OCC ABL handbook PDF |
| OCC dilution cause factors | Returns and allowances, disputes, bad debts, and other credit offsets create dilution. | OCC ABL handbook PDF |
| LegalClarity dilution reserves in collateral valuations | Lenders also build dilution reserves into their collateral valuations | LegalClarity receivables dilution |
| LegalClarity dilution definition on BBC | Dilution refers to the portion of a receivable that is never collected through customer payments. | LegalClarity borrowing base certificate |
| LegalClarity separate dilution reserve on BBC | impose a separate dilution reserve that lowers the borrowing base further | LegalClarity borrowing base certificate |
| Don Clarke: dilution reserve after ineligibles | Even after ineligibles are removed, lenders apply a dilution reserve to the remaining eligible pool. | Don Clarke eligible vs ineligible |
| Don Clarke: reserves come off after ineligibles | Dilution reserves come off availability after ineligibles are removed. | Don Clarke eligible vs ineligible |
| Don Clarke BBC line order (ineligibles vs reserves) | Gross AR, less ineligibles, times the AR advance rate, less AR reserves, equals AR availability. | Don Clarke BBC line-by-line |
| Don Clarke dilution-reserve threshold language | If actual dilution (credit memos, returns, discounts, write-offs) exceeds a threshold -- typically 5 percent -- the lender takes an incremental reserve equal to the excess. | Don Clarke BBC line-by-line |
| Don Clarke dilution percent formula | Dilution % = (Credits + Returns + Allowances + Write-offs) / Gross Sales | Don Clarke reserves / dilution negotiation |
| SEC filed Dilution Reserve definition (excess over 5%) | an amount sufficient to reduce the advance rate against Eligible Receivables by the extent to which Dilution is in excess of 5% | SEC EX-10.14 ABL credit agreement |
Frequently asked questions
What is the difference between a dilution reserve and ineligible AR?
Ineligible AR is excluded entirely from the borrowing base as a categorical strip. A dilution reserve is a percentage haircut on the remaining eligible pool for credits, returns, discounts, and write-offs. Don Clarke lists dilution reserves after ineligibles are removed; OCC lists dilution usually expected to be 5 percent or less of receivables.
Does a dilution reserve apply before or after ineligible AR is removed?
After. Don Clarke states that even after ineligibles are removed, lenders apply a dilution reserve to the remaining eligible pool, and that dilution reserves come off availability after ineligibles are removed. BBC line order is Gross AR, less ineligibles, times the AR advance rate, less AR reserves.
What causes AR dilution in an ABL facility?
The OCC Comptroller's Handbook states that returns and allowances, disputes, bad debts, and other credit offsets create dilution. LegalClarity states that credits, returns, discounts, and write-offs chip away at the total before cash arrives.
How is dilution percent calculated for a dilution reserve?
Don Clarke lists Dilution % = (Credits + Returns + Allowances + Write-offs) / Gross Sales, measured over a trailing 12-month period.
How do filed ABL agreements define a Dilution Reserve?
One filed SEC ABL exhibit defines Dilution Reserve as an amount sufficient to reduce the advance rate against Eligible Receivables by the extent to which Dilution is in excess of 5%.
Related
- Before binding an ABL revolver, which AR lines are ineligible and which get carved back at term sheet?
- What is a concentration reserve or single-debtor cap in an ABL facility?
- What is a borrowing-base certificate and when must it be submitted?
- What AR aging buckets are ineligible in the Eligible Receivable definition?
- Does cross-aged AR count toward the borrowing base at term sheet?
- What is the difference between a field exam and monthly borrowing-base reporting?