A borrowing base measures how much you can borrow with an asset-based loan. It is based on a percent of your collateral’s value.

• What a borrowing base is
• What types of loans use borrowing-base considerations
• How to tally up your collateral with a borrowing base certificate
• How to calculate your borrowing base

Borrowing Base: A Definition

The borrowing base is a metric that commercial lenders use to measure the value of the assets that a business has available to pledge as collateral for an asset-based loan.

This number determines how much the lender can afford to risk loaning you, so your borrowing base is also equivalent to the amount you can borrow from that provider. The higher your borrowing base, the more your lender is willing to loan you, and the more favorable terms and rates they are willing to extend you.

Borrowing-base calculations take into account any assets that you can pledge as collateral, including:

• Real estate
• Equipment
• Inventory
• Accounts receivable

Lenders have no guarantee of being able to recover the full value of a small business owner’s collateral in the event of a loan default. For instance, one’s real estate or inventory may prove slow to sell, equipment may depreciate or some customers may fail to pay what they owe a small business.

What Is the Borrowing Base Advance Rate?

Because of this uncertainty and risk, borrowing base formulas calculate the value of your collateral based on a percentage rate rather than the full value of your assets. This rate is known as a borrowing base advance rate or discount rate.

Advance rates can vary by lender as well as by the type of collateral pledged. You will need to know your lender’s advance rates for the types of collateral you have pledged to calculate your borrowing base.

Once you know the value of your collateral and the percentages for your lender’s advance rates, you can calculate your borrowing base. Multiplying the value of each type of collateral by its corresponding rate and then summing up the totals for all types of collateral yields your borrowing base. The result represents the cap on the amount your lender is willing to loan you.

Note that your borrowing base can vary from lender to lender because lenders can have different advance rates. One lender may be willing to extend you more than another based on the same collateral.

Types of Financing Using the Borrowing Base Metric

In general, a borrowing base may enter into the picture with any type of financing where physical or financial assets are pledged as collateral. Borrowing base most commonly factors into a few major types of financing:

Accounts Receivable Financing

This type of financing, also known as invoice financing, is based on the value of unpaid invoices your customers owe you. You sell your lender your unpaid accounts receivable, and they give you advance based on a percentage of the value of your unpaid receipts. They then collect the full value of your receipts from your customers and pay you the rest of the money, minus a fee that serves as your provider’s cut for their services.

Inventory Financing

With inventory financing, your inventory serves as collateral for a line of credit or short-term loan. Your lender provides you with funds based on a percent of the value of your inventory. You must then repay the money according to the terms of your line of credit or loan agreement.

Equipment Financing

In equipment financing, you borrow money in order to lease, buy or upgrade equipment. The equipment being financed serves as collateral, making this type of financing self-collateralizing.

Real-Estate Financing

The borrowing base is also used in real-estate equity lines of credit and loans. Equity is the amount of money you’d receive after paying off your mortgage if you sold your property. It is calculated by taking the current fair market value of your property and subtracting the amount you still owe on your mortgage. With real-estate equity financing, a lender extends a line of credit or loan based on your equity.

Other tangible assets may serve as collateral for purposes of calculating the borrowing base. However, these are the most common types of financing that employ borrowing base lending calculations.

What Is a Borrowing Base Certificate?

A borrowing base certificate is a form lenders typically have you submit when you apply for an asset-based loan or another form of financing. It identifies all your available assets that can be pledged as collateral. It also identifies the value of your assets and their value after your lender’s advance rates have been applied. This provides the information needed to calculate your borrowing base.

In many cases, lenders prefer to have the information on a borrowing base certificate verified by a third-party professional who can attest to the accuracy of figures. If your borrowing base certificate isn’t directly drawn up by a professional, your lender may require an audit of the information.

Since the value of your assets can change over time, lenders often require the information on base certificates to be reviewed and updated periodically. This may require ongoing audits. If the value of your collateral drops below the level of your original borrowing base, you may need to repay part of your loan to bring your debt back within the parameters set by your lender.

Borrowing Base Certificate Form

The format for a borrowing base certificate generally contains a few key features, which can vary with the type of collateral involved and with your lender’s policies. Key information includes:

• The name of the borrower
• The date of the certificate
• Sections summarizing each type of asset you are offering as collateral, with each section covering:
• Date
• Value of inventory
• Subtractions for any ineligible amounts
• Value after advance rates have been applied
• A summary tallying the value of all your asset types after advance rates have been applied
• Adjustments for any debt balances
• Total borrowing base after adjustments
• A signature block with date

Your lender may supply you with a form for your borrowing base certificate. A third-party professional such as an auditor or lawyer can also provide you with a customized form. You can also create your own form using Excel or online templates.

How to Calculate a Borrowing Base

To calculate your borrowing base, you essentially take the value of each of your asset types, multiply each value by its corresponding advance rate, add up the totals and subtract any loan balances. The specifics of this procedure will vary with the types of assets you’re including as collateral, but in general, the process involves these steps:

• Take the value of any accounts receivable and multiply by your lender’s advance rate
• Take the value of any inventory and multiply by your lender’s advance rate
• Take the value of any equipment and multiply by your lender’s advance rate
• Subtract any existing loan balances

When calculating accounts receivable, the standard procedure is to use what is called an accounts-receivable aging report. This report breaks your accounts due into ranges based on how far they are past due. Asset-based lenders typically require you to exclude accounts that are more than 90 days past due, and they may have other restrictions. This can vary by lender, so check your lender’s requirements before completing your borrowing base certificate.

When calculating the value of inventory, you will need to subtract any ineligible inventory before multiplying by your lender’s advance rate. Ineligible inventory can include:

• Partially finished goods (work-in-progress inventory)
• Inventory you have stored where you don’t pay the supplier until after the goods are consumed (consigned inventory)
• Inventory that is near the end of its life cycle and not expected to be sold (obsolete inventory)

When calculating the value of equipment, use the equipment’s current value that factors in depreciation, not the original value of the equipment. Your lender will also want you to factor depreciation into any ongoing borrowing base certificates.

Borrowing Base Formula

These guidelines can be simplified into a formula:

B = [(AR)*(rAR) + (I)(rI) + (E)*(rE)] – L

Where:

B = Borrowing base

AR = Accounts receivable valuation (after any adjustments for ineligible accounts)

rAR = Advance rate for accounts receivable

I = Inventory valuation (after any adjustments for ineligible inventory)

rI = advance rate for inventory

E = equipment valuation (after depreciation factored in)

rE = advance rate for equipment

L = loan debt

Borrowing Base Example

To illustrate how this formula might be applied, consider a borrowing situation where:

AR = \$5,000,000

rAR = 0.75

I = \$1,500,000

rI = 0.50

E = \$500,000

rE = 0.60

L = \$750,000

Applying the formula:

B = [(\$5,000,000)*(0.75) + (\$1,500,000)*(0.50) + (\$500,000)*(0.60)] – \$750,000

B = (\$3,750,000 + \$750,000 + \$300,000) – \$750,000

B = \$4,800,000 – \$750,000

B = \$4,050,000

So in this case, the company’s borrowing base would be \$4,050,000 and the lender would be willing to extend the business that amount based on current collateral.