A borrowing base is the amount a lender will let you have outstanding on a line, calculated from your collateral. The lender takes your receivables and inventory, strikes out what it will not lend against (ineligibles), applies an advance rate to what remains, typically 80% to 90% of eligible receivables and up to 85% of the net orderly liquidation value of inventory, then deducts reserves. You report the figures on a borrowing base certificate, usually monthly. Availability is the lower of the base and the commitment, less what you have already drawn.
- Receivables advance
- Typically 80% to 90% of eligible receivables
- Inventory advance
- Up to 85% of net orderly liquidation value, roughly half of cost
- Aged receivables
- More than 90 days past invoice are typically ineligible
- Single-customer cap
- Commonly 20% to 25% of eligible receivables
- Reporting
- A borrowing base certificate, usually monthly, plus agings and inventory reports
- Verification
- Field exams and inventory appraisals, before closing and periodically after
The borrowing base in one formula
Every asset-based line comes down to the same arithmetic. The lender starts with the collateral on your books, removes what it would struggle to collect or sell, lends a fixed share of what is left, and holds back reserves for risks the formula does not capture.
Borrowing base = (eligible receivables × receivables advance rate) + (eligible inventory, valued at its appraised net orderly liquidation value, × inventory advance rate, up to any inventory sublimit) − reserves.
Two numbers then matter to you. The commitment is the maximum the lender has agreed to lend under any circumstances, the figure on the term sheet. Availability is what you can draw today: the lower of the commitment and the borrowing base, minus loans already outstanding and any letters of credit issued under the line. A business with a large commitment and a small base has a small line. Owners are regularly surprised by this, because the commitment is the number that gets announced and the base is the number that gets used.
The logic is a liquidation test. An asset-based lender asks what it would recover if it had to collect your receivables and sell your inventory without you. The advance rate leaves a margin for the cost and shortfall of doing that. This is why an asset-based line can be larger than your earnings alone would support, and also why it can shrink quickly when collateral quality slips. For how that compares with a line sized on earnings, see asset-based vs cash-flow lines.
The four moving parts
| Component | What it does | Who sets it, and how |
|---|---|---|
| Eligibility criteria | Removes collateral the lender will not count: aged, disputed, related-party, foreign or over-concentrated receivables; obsolete, work-in-process or off-site inventory | Written into the loan agreement as definitions of eligible receivables and eligible inventory; the lender usually keeps the right to tighten them |
| Advance rates | The share of eligible collateral the lender will lend: typically 80% to 90% for receivables, up to 85% of net orderly liquidation value for inventory | Negotiated at closing from the field exam and appraisal; can be lowered if dilution rises or an appraisal falls |
| Sublimits | Caps how much of the base any one class can supply, most often inventory | Fixed in the agreement as a dollar ceiling or as a share of the total base |
| Reserves | Holds back availability for risks that sit ahead of the lender or outside the formula | Usually at the lender's reasonable credit judgement, within limits the agreement describes |
Eligibility does most of the work. A business with a clean aging and moving inventory loses little to it; a business with old invoices, a dominant customer and a warehouse full of slow stock can lose a large share of its gross collateral before any advance rate is applied. The rules for receivables are set out in detail in eligible vs ineligible receivables, and for inventory in how lenders advance against inventory.
A worked example
Take a distributor with receivables of 5,000 and inventory carried at a cost of 3,000, on a line with a commitment of 5,000 and 3,000 already drawn. The figures are illustrative, in thousands.
| Line of the certificate | Amount | Note |
|---|---|---|
| Gross receivables | 5,000 | From the aging, reconciled to the balance sheet |
| Less: over 90 days past invoice | (400) | Aged receivables |
| Less: cross-aged customers | (150) | Current invoices of customers with too much past due |
| Less: concentration excess | (250) | One customer's balance above the cap |
| Less: affiliate receivables | (100) | Owed by a related company |
| Eligible receivables | 4,100 | |
| Receivables availability at 85% | 3,485 | Within the typical 80% to 90% range |
| Eligible inventory at cost | 3,000 | After removing obsolete and in-transit stock |
| Appraised net orderly liquidation value | 1,800 | From the inventory appraisal |
| Inventory availability at 85% of that value | 1,530 | Roughly half of cost |
| Inventory after sublimit | 1,200 | The agreement caps inventory at 1,200 |
| Less: reserves | (200) | Rent reserve for a leased warehouse without a landlord waiver |
| Borrowing base | 4,485 | Below the 5,000 commitment |
| Less: loans outstanding | (3,000) | |
| Availability | 1,485 | What the business can draw today |
Notice where the value went. Gross collateral of 8,000 at book produced a base of 4,485, and the commitment of 5,000 is never fully reachable at this collateral mix. The largest single leak was inventory, which lost value three times: to the appraisal, to the advance rate and to the sublimit. The receivables side lost 900 to ineligibles, most of which the business could reduce by collecting old invoices and diversifying its largest customer.
The commitment is what the lender agreed to. The borrowing base is what your collateral earns. You can only draw the lower of the two.
The borrowing base certificate and cash dominion
The borrowing base certificate is the document you deliver to recalculate the base. It is usually monthly; lenders move to weekly or even more frequent reporting when availability is tight or the borrower is under stress. A certificate typically comes with:
- A receivables aging by customer and invoice, with days outstanding, reconciled to the general ledger
- A payables aging, which lenders use to spot stretched vendors and contra accounts
- An inventory report by location and category, if inventory is in the base
- The calculation itself, signed by an officer who certifies it is accurate
That signature matters. A certificate that overstates the base is a misrepresentation under the loan agreement, and lenders treat it far more seriously than a missed covenant. Errors that come from sloppy reconciliations still count. Businesses that run lines well tie the aging to the balance sheet every month before the certificate goes out.
Most asset-based lines also control the cash. Customers pay into a lockbox or a deposit account the lender controls, and collections sweep against the loan each day. Some agreements run this full time; others use springing cash dominion, which switches on only if availability falls below a threshold or a default occurs. Either way, the practical effect is that the line revolves: collections pay it down, and new draws fund payroll and suppliers against the refreshed base.
Reserves: the lever owners overlook
Reserves reduce availability without touching eligibility or advance rates, which is why they deserve attention at the term sheet stage. The common ones:
- Rent and bailee reserves for inventory held in a leased warehouse or at a third party, unless the landlord or warehouse signs a waiver giving the lender access to the goods
- Priority payables reserves for amounts that could rank ahead of the lender, such as unpaid sales, payroll or other trust-fund taxes
- Dilution reserves when credits, returns and discounts erode collections more than the advance rate allows for
- Availability blocks, a fixed amount of the base the borrower may never draw, which some lenders use in place of a financial covenant
- Discretionary reserves the lender may impose in its reasonable credit judgement when collateral or the business changes
The last category is where negotiation matters. A well-drafted agreement limits discretionary reserves to changes the lender did not know about at closing, requires notice before they take effect, and ties them to the risk they address. Without those limits, a lender can reduce your line in the middle of a season without changing a single term.
Field exams and appraisals
An asset-based lender does not take the certificate on trust. Before closing, and usually periodically afterward, it sends examiners to test the books. A field exam typically traces sales from invoice to shipping record to cash receipt, verifies balances directly with a sample of customers, measures dilution, tests the aging against the ledger and looks for items the certificate should have excluded. An inventory appraisal estimates what the stock would fetch in an orderly liquidation, net of the costs of selling it, category by category.
The findings set the terms. A clean exam supports the higher end of the advance-rate range and fewer reserves. An exam that finds unrecorded credits, invoices raised before goods ship, or an aging that does not tie to the ledger leads to lower advance rates, new reserves or a smaller commitment. The borrower usually pays for exams and appraisals, and their frequency often steps up if availability runs low.
The single most useful preparation is to run your own exam first: reconcile the aging to the balance sheet, apply unapplied cash and open credits, and pull out the invoices you already know are doubtful. What a lender's examiner finds, it prices.
What lenders ask for, and where Transparent fits
For a line of credit or asset-based facility, Transparent's own checklist asks for:
- AR aging, by customer, with days outstanding
- AP aging
- Balance sheet
- P&L / income statement
- Year-to-date P&L through last month-end (optional)
- Debt schedule and UCC position, showing existing liens
- Inventory report, if inventory is part of the borrowing base (optional)
- Bank statements (optional)
- Business tax returns, 2–3 years (optional)
From those, the first question is a borrowing base estimate: how much of your gross collateral survives eligibility, and at what advance rates. That number, set against your peak working capital need, tells you whether an asset-based line is the right tool, whether a cash-flow line would give more room, or whether factoring fits better while the books mature.
Of the 1,800+ lenders in Transparent's book, 235 write asset-based loans and lines and 116 write factoring. Advance rates, eligibility definitions, reserve language and exam frequency differ from one to the next, and those terms decide how much of the commitment is usable, just as pricing decides what it costs. The full lender package, including the financing model, is built in a day once the documents are in. See how we underwrite for what that package contains.
Common questions
- What is the difference between a line's commitment and its borrowing base?
- The commitment is the most the lender has agreed to lend. The borrowing base is what your eligible collateral supports this month after advance rates and reserves. You can draw the lower of the two, less what is already outstanding.
- What happens if my loans exceed the borrowing base?
- That is an overadvance. Most agreements require you to repay the excess immediately or within a very short period. Some lenders will agree a temporary, documented overadvance for a seasonal peak, but an unapproved one is usually a default.
- How often do I have to deliver a borrowing base certificate?
- Monthly is common. Lenders often require weekly reporting when availability is low, when the borrower is growing fast, or after a covenant problem, and they can require it at any time under most agreements.
- Can the lender change the advance rate after closing?
- Usually yes, within limits. Agreements commonly let the lender adjust advance rates or add reserves after a field exam or appraisal, or when dilution rises. Negotiating clear triggers and notice periods for those changes is worth the effort.
- Does a cash-flow line of credit have a borrowing base?
- Often not. A cash-flow line is sized on earnings and policed by financial covenants. Some bank lines to smaller businesses do use a simple borrowing base formula, so read the term sheet for a definition of eligible receivables.
- Who pays for field exams and appraisals?
- The borrower, in almost every agreement. The loan documents typically set how often the lender can run them at your expense, and that frequency usually rises when availability is tight.