Canada: Strategies For Margining In-Transit Inventory


In-transit inventory represents a significant, and growing, proportion of inventory for many borrowers, who often look to their lenders to advance against such inventory. 1

As part of the lender's security package, the lender will have a security interest over the borrower's in-transit inventory. However, before the lender can consider including the inventory in the borrowing base, the lender needs to ensure that the borrower actually has title to the inventory. Further, unlike the typical situation where the inventory is located at the borrower's premises (where the lender will have access pursuant to the loan agreement/ security documents and/or a landlord waiver), the lender does not have any control over what the borrower's carriers will do with the inventory.

After a brief discussion of some of the issues involved in confirming ownership of the inventory, this article will examine a few of the different strategies available to give the lender the comfort necessary to include at least a portion of the in-transit inventory in the borrowing base.


As part of the due diligence/monitoring process, the lender must ensure that any margined inventory is actually owned by the borrower

The sale agreement with the vendor will address the timing of title transfer. For example, if the terms indicate 'FOB port' or 'FOB shipping point'2 the title will be deemed to have passed once the goods have been accepted by the borrower's carrier. In other words, the borrower will have title to the goods as soon as goods are in-transit. In this scenario, the buyer is responsible for the transportation arrangements and the buyer bears the risk of damage to the goods and would therefore be responsible for obtaining the cargo insurance.

While it is typical that the seller is responsible to deliver the goods to the buyer's carrier for transportation and that such delivery would mark the time when title passes to the buyer, it is also possible that the seller has agreed to make the delivery and that the title remains with the seller until such delivery is complete. This distinction is obviously crucial to the lender since the lender could make the mistake of including assets in the borrowing base which are not yet owned by the borrower. Therefore, the lender will need to carefully review the purchase documents.

Bills of Lading Made to the Order of the Lender

The lender's security interest in the collateral will, of course, be helpful to secure the lender's interest in the borrower's in-transit inventory, but it will not be sufficient to prevent a carrier from delivering goods to the buyer or otherwise contrary to the lender's wishes.

A key issue is what kind of ocean bill of lading (or other similar document of title) has been issued in connection with each shipment. The bill of lading is both the carrier's receipt to the shipper and a 'collection' document for receipt of the goods. The lender will need to determine whether the bills of lading are marked as negotiable or non-negotiable.

If the bills of lading are non-negotiable, then the carrier must provide delivery only to the consignee named in the document. If the named consignee is the borrower, then the lender will need to rely on the covenants in its credit and security agreements and the provisions of the applicable personal property and insolvency legislation to enforce its security interest.

The lender could, however, require that all bills of lading state that the inventory is made expressly to the order of the lender rather than the borrower. From a security perspective, this would be the ideal solution as it would provide the lender with control over the inventory being margined as the carrier will have to deliver directly to the lender. From a practical perspective, however, this option may be problematic during the ordinary course as it would involve the lender having to then endorse each bill of lading over to the borrower; the volume of shipments may make this alternative unworkable. This solution would make more sense where the shipments are less frequent, and would perhaps be more useful after an event of default has occurred where this kind of monitoring may be more important to the lender and be more acceptable to the borrower.

If the bills of lading are negotiable, then whichever person holds the original, paper bill of lading, properly endorsed, is deemed to have the right of ownership of the goods and the right therefore to direct shipment. In this scenario, the safest approach would be for the lender to ensure that it holds the original, paper bill of sale, properly endorsed. Again, in the ordinary course this may not be feasible from a logistical perspective.

The Access Agreement or 'Comfort' Letter

Another option is for the lender to obtain written access agreements (commonly referred to as 'comfort' letters) from each carrier involved in the transportation process. The basic objective of the access agreement is to provide the lender with at least some level of control over the inventory and also to limit the costs that the lender will need to incur when enforcing against that inventory.

There are several key provisions that the access agreement would typically include:

  • Most importantly, the access agreement will provide that, upon receipt of notice from the lender, the carrier will follow all instructions of the lender (and only the lender) regarding the release of the collateral.3 The borrower will, of course, want to ensure that until such notice has been given, the carrier will continue to follow the instructions of the borrower.4
  • As discussed earlier, where the bills of lading are made to the order of the lender as consignee, the lender will have greater control over the collateral. With that in mind, the lender will want the access agreement to include a right to require that any future bills of lading are to be issued in this manner.
  • To protect the lender's interest in the collateral, the lender will want to restrict the ability of the carrier to take any action to encumber or transfer any interest in the inventory. However, the carrier will reasonably require a carve-out for liens and charges against the collateral which may arise as a result of engaging third party transportation agents during the normal course of the carriage, custody and handling of the collateral to cover, for example, (i) freight and other charges, (ii) wrongful death, personal injury, loss or damage to the ship, ship's equipment or other cargo caused by the collateral, and (iii) fines or other liabilities incurred by the carrier which were not the fault of the carrier. Therefore, the lender will want to consider maintaining a reserve sufficient to ensure there are enough funds to allow for the payment of such amounts at the time that the lender seeks to enforce the access agreement.
  • The carrier will likely require reimbursement by the lender for all reasonable expenses, including freight, duties and harbour fees incurred by the carrier as a result of complying with the instructions of the lender as to the disposition of any of the collateral. The lender will want it made clear, however, that other than these specific amounts, the borrower (and not the lender) is solely responsible for payment of any charges which are to the borrower's account and for paying any fees, expenses, customs duties, taxes or other charges which are, or may accrue, to the account of the collateral. In other words, if the lender decides not to enforce the access agreement, the lender will want to avoid any direct obligations to the carrier.
  • To reduce the risk that the inventory cannot be sufficiently identified as the borrower's assets, the lender should require that the carrier not commingle the borrower's inventory with any other property being shipped.5
  • To assist the lender in monitoring the amounts that may be due to the carrier (and therefore allow the lender to maintain an appropriate reserve amount), the lender may request that the carrier promptly notify the lender if any amounts owing to the carrier remain unpaid by the borrower for more than, for example, thirty days beyond the original invoice date.
  • The lender should request the carrier to agree to facilitate delivery by coordinating with the applicable ports, terminals and governmental authorities once the lender has provided instructions.6 Continuous monitoring of the collateral during shipment will obviously be a key objective for the lender, who will therefore want the carrier to provide the lender electronic access to any information to the extent it is available for the purpose of tracking or monitoring the goods.

The access agreement is obviously not a 'bullet-proof' solution. As discussed above, even with the access agreement in place, the lender may incur material costs in connection with realizing on the inventory.

Further, depending on the situation, it may not be practical to obtain an access agreement from each (or any) carrier involved in the process.7 Similarly, it may be expensive and time-consuming to attempt to enforce the access agreement against a carrier whether the carrier abides by the terms of the agreement or not.8

Finally, there may be a question as to the enforceability of the access agreement; that is, the carrier is not receiving any additional consideration in exchange for the rights it is granting to the lender.9

It is clear that even with an access agreement in place, the lender may incur material costs or delays in realizing on any in-transit inventory. The lender will therefore wish to consider additional reserves and/or changes to the advance rate in respect of any eligible in-transit inventory.


Another crucial element is insurance. No access agreement or title document will protect the inventory from risk of loss, damage or delay while in transit. Therefore, the lender should insist on seeing evidence of adequate marine insurance coverage, and ensure that the lender is properly identified as loss payee.10

Sample Definition for Eligible in-Transit inventory

Incorporating the ideas discussed above, the following is a sample loan agreement provision addressing the definition of eligible in-transit inventory:

"... it is not in-transit inventory unless it is being imported into Canada or the United States and is subject to appropriate marine insurance satisfactory to Lender in its sole discretion, and (A) Lender has obtained an assignment of the bills of lading relating to such inventory, or (B) is subject to (1) appropriate acknowledgement/access agreement from the shipper of such inventory, and (2) all such other import documentation and requirements as may be required by Lender in its sole discretion.


As global trade increases, the issues relating to the financing of in-transit inventory will only become more important. By utilizing some of the strategies available, lenders may find the comfort necessary to permit the inclusion of in-transit inventory in the borrowing base.


1 The value of Canadian imports surpassed Cdn. $402,754,000,000 in 2010, representing a 10.3% increase over the previous year and 17.4% cumulative increase over the previous ten years: Industry Canada, Trade Data Online: Trade By Products (HS Code), online: sc_mrkti/tdst/tdo/tdo.php#tag.

2 The terms will differ depending on the applicable jurisdiction.

3 The lender will want this provision to be drafted broadly, to cover all inventory, whether in the carrier's actual possession or control or located at any of the carrier's premises and/or delivered to the carrier by or for the borrower's account for distribution, customs clearance, storage or any other purpose.

4 Similarly, the borrower will of course prefer to restrict the lender's ability to notify the carrier until there has been an event of default.

5 In addition, the lender will want the carrier to expressly acknowledge that the carrier is holding the collateral as bailee and otherwise for the lender for the purpose of perfecting the security interest of the lender in the collateral.

6 The carrier will reasonably require that (a) the lender's instructions must comply with applicable law and, in regard to providing the lender with access to the collateral, that (b) the collateral must have been cleared by customs, and (c) that the lender's agents seeking access must execute releases from wrongful death or personal injury, which in any event will likely be required by the port, terminal and/or governmental authorities.

7 Ideally, the lender would obtain the comfort letter from the carrier involved with a material portion of the inventory, to allow at least that particular inventory to be margined.

8 If the carrier refuses to abide by the terms of the agreement, the lender would have to initiate proceedings. But even if the carrier complies, there will be costs involved (as noted above) and, depending on stage of the transportation process, there may be significant delays. There is also the possibility that the carrier delivers contrary to the lender's instructions through inadvertence or miscommunication.

9 However, it is unlikely that the carrier will knowingly breach the access agreement in any event, obviously not wishing to expose itself to liability to a third party lender where there would be little benefit to the carrier to challenge the validity of the agreement.

10 In the ordinary course, claims under marine insurance policies are paid out to the named consignee or, in the case of a negotiable bill of lading, to the holder of the original bill of lading.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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