A borrowing base is the formula that sets how much a business can draw on an asset-based line of credit at any moment. It takes eligible receivables times an advance rate, typically 80% to 90%, plus eligible inventory times a lower rate, less reserves the lender holds back. Receivables more than 90 days past invoice, over-concentrated customers and certain other accounts are excluded. The business can borrow the lesser of the borrowing base and the line's commitment, and reports the calculation to the lender on a borrowing base certificate, monthly or more often.
- Formula
- (Eligible receivables × advance rate) + (eligible inventory × advance rate) − reserves
- Receivables advance
- Typically 80% to 90% of eligible receivables
- Inventory advance
- Typically up to 85% of net orderly liquidation value, or roughly half of cost
- Common exclusions
- Over 90 days past invoice; single customers above 20% to 25% of eligible receivables
- Reported on
- A borrowing base certificate, monthly or more often
What a borrowing base is
An asset-based lender lends against collateral it could turn into cash if the business failed: receivables that customers owe, and inventory that could be sold. The borrowing base is the lender's running estimate of how much of that collateral it can safely lend against. It is recalculated as the collateral changes, so availability rises as the business invoices and falls as customers pay or invoices age.
Two numbers limit what the business can draw. The commitment is the maximum size of the line in the loan agreement. The borrowing base is what the collateral supports today. The business can have outstanding the lesser of the two. What remains after the drawn balance is excess availability, the figure lenders watch most closely, because many covenants, including the springing fixed charge coverage test, turn on it.
What goes into it
Eligible receivables are the core. Asset-based lenders typically advance 80% to 90% of them. The advance rate is lower than the full value to cover dilution: credits, returns, discounts and write-offs that mean a receivable collects less than its face amount.
Eligible inventory is often added, at a lower advance rate because inventory is harder to turn into cash. Lenders typically advance up to 85% of net orderly liquidation value, what an appraiser estimates the inventory would fetch in an orderly sale after costs, or roughly half of cost. Finished goods usually count; raw materials sometimes; work in process rarely. Inventory is often capped as a share of the total base. See how lenders advance against inventory.
Reserves reduce the base for things that would rank ahead of the lender or dilute the collateral: rent owed on premises where inventory sits, taxes that could become liens, customer deposits, rebates owed, or an estimate for dilution above normal. Loan agreements usually let the lender set reserves in its reasonable credit judgment, which is why reserves are worth discussing before signing.
What is ineligible
Not every receivable counts. The ineligible categories are written into the loan agreement and are among its most important terms. The usual list:
- Aged receivables. Receivables more than 90 days past invoice are typically ineligible.
- Cross-aged accounts. If a large share of one customer's balance is past the aging limit, the whole of that customer's balance may be excluded.
- Concentration excess. Borrowing bases commonly cap any single customer at 20% to 25% of eligible receivables; the amount above the cap is excluded.
- Contras. Customers who are also suppliers, to the extent of what the business owes them, since they could offset.
- Affiliates and insiders. Receivables from related companies or owners.
- Foreign and government accounts, unless credit-insured or properly assigned.
- Bill-and-hold, progress billings and retainage, where the goods or work are not complete and the customer may not owe the full amount yet.
- Disputed or contingent accounts.
Eligibility is where most of the negotiation happens, and where most of the surprises sit. A business with a large customer, a construction business with retainage, or a distributor with slow government payers can find that its eligible receivables are far smaller than its aging suggests. See eligible vs ineligible receivables.
A worked example
A distributor has receivables of 1,000 and inventory of 400 at cost. Its line has a commitment of 1,000, with 600 drawn.
| Step | Amount |
|---|---|
| Gross receivables | 1,000 |
| Less: more than 90 days past invoice | (80) |
| Less: contras and affiliate accounts | (20) |
| Eligible before concentration | 900 |
| Less: largest customer above a 25% cap (balance 300, cap 225) | (75) |
| Eligible receivables | 825 |
| Receivables availability at 85% | 701 |
| Inventory availability at roughly half of cost (400 at cost) | 200 |
| Less: reserves (landlord rent, taxes) | (50) |
| Borrowing base | 851 |
| Lesser of borrowing base and commitment | 851 |
| Less: drawn balance | (600) |
| Excess availability | 251 |
Two things stand out. First, the line's commitment is 1,000, but the business can have at most 851 outstanding, and has only 251 left to draw. Second, 75 of the 175 of receivables excluded comes from a single customer whose invoices are perfectly good; they are simply too concentrated. If that customer grows faster than the rest of the book, availability will not keep up with sales.
The commitment is the ceiling on paper. The borrowing base is the ceiling that applies, and it moves every time you report.
The borrowing base certificate
The business reports its borrowing base to the lender on a certificate, signed by an officer, usually monthly and sometimes weekly or daily when availability is tight or the business is under closer watch. The certificate shows gross collateral, each category of ineligible, the advance rates, reserves and the resulting availability. It is supported by an AR aging by customer with days outstanding, an AP aging, and an inventory report if inventory is in the base.
Lenders test the certificate against reality. Before closing and periodically after, a field examiner visits to reconcile the agings to the general ledger, sample invoices and proof of delivery, verify balances with customers, test dilution and review collections. Inventory is appraised to set its liquidation value. Findings can change advance rates or add reserves, so a clean first field exam matters.
Accuracy matters more than presentation. A certificate that overstates the base, even by carelessness, gives the lender grounds to call a default. A business whose reporting is consistently clean earns room: fewer surprises at field exams and more willingness to accommodate a seasonal spike.
Living with a borrowing base
A borrowing base makes the line self-adjusting, which is its great strength for a growing business: availability grows with sales without renegotiating the loan. It is also why an asset-based line is sized differently from a cash-flow line; see asset-based vs cash-flow lines and how lenders size a working capital line.
The same mechanism cuts the other way. When sales fall, receivables fall and availability shrinks, just when cash is tight. When collections slow, invoices age past the limit and drop out. If the borrowing base falls below the drawn balance, the business is overadvanced and must usually repay the difference at once. Keeping a cushion of excess availability, collecting to terms, and watching concentration before it becomes a problem are the habits that keep an asset-based line working.
Lenders reviewing a new line ask for the AR aging by customer with days outstanding, AP aging, balance sheet, P&L and year-to-date P&L, a debt schedule showing existing liens, an inventory report if inventory is in the base, and often bank statements and tax returns. Transparent's book holds 235 lenders writing asset-based loans and lines. For businesses not yet ready for one, factoring works on some of the same collateral; see factoring vs asset-based lending.
Common questions
- What is the difference between a borrowing base and a credit limit?
- The credit limit, or commitment, is the maximum size of the line. The borrowing base is what the collateral supports right now. You can draw the lesser of the two.
- How often do I submit a borrowing base certificate?
- Usually monthly, with the AR and AP agings. Lenders may require weekly or daily reporting when availability is tight, when the business is growing quickly, or after a problem at a field exam.
- What happens if my borrowing base drops below what I have borrowed?
- The line is overadvanced, and the loan agreement usually requires the excess to be repaid immediately. Some lenders agree to a temporary overadvance in advance for a seasonal peak, but it is negotiated, not assumed.
- Can the lender change the advance rate?
- The advance rates are set in the agreement, but lenders usually keep the right to add reserves or adjust eligibility in their reasonable credit judgment, often after a field exam shows higher dilution or weaker collateral.
- Why are my eligible receivables so much lower than my aging?
- Usually because of aged invoices, a concentrated customer, contras, retainage or affiliate balances. Each is excluded under the agreement's eligibility rules. Reviewing the aging against those rules before signing avoids surprises.