You prepare it by rolling receivables forward from the last certificate to the month-end AR aging, tying that total to the general ledger, subtracting ineligibles and applying the advance rate to what remains. Do the same for inventory if it is in the base, apply any sublimit, then deduct reserves. The result, capped at the commitment, less loans and outstanding letters of credit, is your availability. An officer signs it, usually monthly, with the aging, inventory report and payables aging attached. Most errors come from ineligibles computed by hand.
- What it is
- The signed monthly recalculation of what you may borrow
- How often
- Usually monthly; weekly or more often when availability is tight or dominion is on
- Who signs
- An officer, certifying it is true and complete
- Core backup
- AR aging tied to the ledger, AP aging, inventory report
- Most common error
- Ineligibles calculated by hand, especially concentration and cross-aging
What you are signing
A borrowing base certificate recalculates the collateral behind an asset-based line using the lender's own definitions: which receivables and inventory are eligible, at what advance rates, less which reserves. It is the mechanism that makes the line revolve. As receivables are collected and new ones billed, the certificate resets how much you may have outstanding.
The officer's signature turns it into a representation under the credit agreement. A certificate that materially overstates availability is a misrepresentation, which in most agreements can be an event of default on its own, whether or not the error was deliberate. Lenders take a wrong certificate at least as seriously as a missed financial covenant, because the certificate is the only thing standing between their loan and collateral they cannot see day to day.
Most lines require a certificate monthly, due a set number of days after month-end, with a draw request in between if the lender funds against it. Reporting moves to weekly, or more often, when availability falls below a threshold, when cash dominion springs, or after the lender loses confidence in the numbers. The lender's form will look slightly different from the one below, but every certificate follows the same logic.
The certificate, line by line
| Line | What goes there | Where it comes from |
|---|---|---|
| Beginning receivables | Gross receivables from the last certificate | The prior certificate, unchanged |
| Plus sales invoiced | All invoices issued in the period | Sales journal |
| Less collections | Cash received against receivables | Cash receipts journal, tied to lockbox or bank deposits |
| Less credits and adjustments | Credit memos, discounts, write-offs | Credit memo register |
| Ending gross receivables | Must equal the total of the aging and the ledger balance | AR aging and general ledger |
| Less ineligibles | Each category on its own line: aged, cross-aged, affiliates, foreign, government, contra, concentration excess, and others the agreement lists | Ineligibles schedule built from the aging |
| Eligible receivables | Gross less ineligibles | Calculated |
| Times advance rate | The agreed rate, typically 80% to 90% of eligible receivables | Credit agreement |
| Receivables availability | Eligible times the rate | Calculated |
| Gross inventory | At cost, by category and location | Perpetual inventory report |
| Less ineligible inventory | Slow-moving, obsolete, work-in-process, in transit, consigned, at locations without a waiver | Inventory report and aging |
| Inventory availability | Eligible inventory at the agreed rate, up to 85% of net orderly liquidation value, capped by any sublimit | Appraisal and credit agreement |
| Less reserves | Each reserve the lender has set | Lender's notices |
| Borrowing base | Receivables and inventory availability less reserves | Calculated |
| Lesser of base and commitment | The line cannot exceed the commitment, however large the base | Credit agreement |
| Less loans and letters of credit | The revolver balance and any outstanding letters of credit | Loan statement and letter of credit report |
| Excess availability | What is left to draw | Calculated |
Two lines carry more weight than they appear to. The receivables roll-forward at the top is how the lender checks your aging: if beginning balance plus sales less collections and credits does not equal the ending aging, something is missing, misposted or double counted. And outstanding letters of credit reduce availability dollar for dollar even though no cash has been drawn, which catches owners out when a supplier or landlord asks for one.
A completed certificate
A manufacturer with a 5,000 commitment (all figures in thousands) prepares its month-end certificate. Its largest customer owes 1,080. The agreement caps any one customer at 25% of eligible receivables, measured before the concentration excess is removed.
| Line | Amount |
|---|---|
| Beginning receivables | 3,850 |
| Plus sales invoiced | 2,300 |
| Less collections | 2,050 |
| Less credits and adjustments | 100 |
| Ending gross receivables | 4,000 |
| Less over 90 days past invoice | 180 |
| Less cross-aged balances | 70 |
| Less affiliate receivables | 40 |
| Less contra, to the extent of the payable | 30 |
| Less concentration excess (1,080 less 25% of 3,680) | 160 |
| Eligible receivables | 3,520 |
| Receivables availability at 85% | 2,992 |
| Eligible inventory, net orderly liquidation value 1,300, at 85% | 1,105 |
| Inventory availability, capped by a 1,000 sublimit | 1,000 |
| Less rent and bank product reserves | 150 |
| Borrowing base | 3,842 |
| Lesser of base and 5,000 commitment | 3,842 |
| Less revolver balance | 3,300 |
| Less outstanding letters of credit | 200 |
| Excess availability | 342 |
Notice how little of the commitment is actually usable. The line is 5,000, but after ineligibles, the inventory sublimit, reserves and a letter of credit, the business can draw 342 more. That is the number the CFO should be managing to, as excess availability explains.
Where certificate errors come from
Arithmetic is rarely the problem. The errors that recur are in the ineligibles, because they depend on definitions that are easy to apply loosely in a spreadsheet:
- Concentration measured on the wrong base. In the example, applying the 25% cap to gross receivables of 4,000 instead of 3,680 would allow the largest customer 1,000 rather than 920, overstating eligible receivables by 80 and availability by 68.
- Cross-aging skipped or stale. Cross-aging removes a customer's current invoices once enough of its balance is past the cut-off. A spreadsheet that removes only the old invoices, or that uses last month's list of cross-aged customers, overstates the base. Here that is 70 of receivables.
- Aging from due date instead of invoice date. Many accounting systems age from due date. Many agreements measure from invoice date. A customer on long terms looks current in your system and aged in the lender's.
- Contra accounts not refreshed. The offset for customers who are also suppliers must use this month's payables, not the balance from the last field exam.
- Credits posted after the cut-off. Credit memos issued in the first days of the next month for sales of this month leave receivables overstated on the certificate.
- Inventory cut-off and location. Goods shipped but still counted in inventory, goods received but not yet invoiced by the supplier, and stock moved to a site without a landlord waiver all distort the inventory lines.
One error is a correction. Repeated errors lead to more frequent reporting, more field exams, new reserves and, eventually, a lower advance rate.
That escalation is the real cost. A lender that no longer trusts the certificate protects itself with the tools it has, and every one of them reduces availability or adds work. The field exam is where the lender recalculates your certificates independently, and discrepancies found there carry into its report.
The backup that goes with it
The certificate is a summary. The lender needs to be able to rebuild it, so each one travels with supporting reports. Requirements vary, but a typical package looks like this:
| Report | Why the lender wants it | Usually delivered |
|---|---|---|
| AR aging by customer and invoice, with days outstanding | Source of every receivables line and ineligible | With each certificate |
| Reconciliation of the aging to the general ledger | Proves the aging is complete | With each certificate |
| Ineligibles schedule | Shows how each exclusion was calculated | With each certificate |
| AP aging | Contra accounts, stretched suppliers, priority payables such as taxes | With each certificate, or monthly |
| Inventory report by category and location | Source of the inventory lines | With each certificate if inventory is in the base |
| Sales journal, cash receipts and credit memo register | Supports the roll-forward | Monthly, or on request |
| Financial statements and compliance certificate | Covenants and the overall credit | Monthly or quarterly, as the agreement sets |
Building a certificate that holds up
The fix for most certificate problems is to stop building the certificate by hand. Export the aging and inventory report straight from the accounting system each month, and let formulas apply the lender's definitions: the aging cut-off by invoice date, the cross-aging threshold, the concentration cap on the right base, the contra offset from the current payables aging. Keep a copy of each month's workbook. Have someone other than the preparer tie the totals to the general ledger before the officer signs.
Build the definitions from the credit agreement itself, not from memory or the term sheet. Eligibility clauses are long, and small differences, such as whether the cap is measured before or after the excess is removed, change the answer every month. If a definition is unclear, ask the lender how it applies it before the first certificate, not after the first exam.
Lenders ask for much of this before they lend. Transparent's line of credit checklist starts with the AR aging by customer with days outstanding, the AP aging, the balance sheet and P&L, the debt schedule with existing liens, and the inventory report if inventory is part of the base. The same reports that will back every future certificate are what the lender uses to estimate the base at the outset, so a clean, reconciled aging helps twice. How a borrowing base works covers the mechanics behind each line, and what lenders look for in an AR aging covers the report at the top of the certificate.
Common questions
- How often do I have to deliver a borrowing base certificate?
- Most asset-based lines require one monthly. Lenders move to weekly or more frequent reporting when availability is tight, when cash dominion is in effect, or after errors. Some agreements also require one with each draw request.
- What happens if I make a mistake on a certificate?
- Report it to the lender as soon as you find it and deliver a corrected certificate. If the error overstated availability and you drew against it, you will need to repay the excess. A single honest error is usually corrected without consequence; repeated errors lead to closer monitoring.
- Who can sign the certificate?
- The credit agreement names the officers who may sign, usually the CFO, controller or CEO. The signer certifies the figures are true and complete, so the signer should understand how each line was calculated.
- Why does my availability not match the commitment?
- The commitment is the most the lender will ever lend. Availability is the lesser of the commitment and the borrowing base, less what is already drawn and any outstanding letters of credit. Ineligibles, advance rates, sublimits and reserves usually leave the base below the commitment.
- Does the lender check the certificate?
- Yes. Lenders review each certificate against the backup reports and recalculate it independently at every field exam, testing samples of invoices, collections and credits against source documents.