Borrowing Base

A borrowing base is the maximum amount a lender will extend to a borrower based on the value of pledged collateral. Lenders apply a discount—often called an advance rate or margin—to the collateral’s reported value to account for risk and volatility, creating a secured credit limit tied to asset performance.

Key takeaways
* The borrowing base sets a loan ceiling tied to collateral value, not borrower cash flow.
* Lenders apply a discount (advance rate) to collateral values; the loan amount equals collateral × advance rate.
* Common collateral: accounts receivable, inventory, equipment, and industry-specific assets (e.g., oil and gas reserves).
* Borrowing bases are redetermined periodically and can increase or decrease as collateral values change.
* Accurate reporting, certificates, appraisals, and audits help maintain the borrowing base’s integrity.

How a borrowing base works

1. Collateral identification: The borrower designates eligible assets (receivables, inventory, equipment, reserves) as collateral.
2. Valuation and advance rates: The lender assigns advance rates to each asset class (for example, 80–90% on eligible receivables, lower on inventory or specialized equipment). These rates reflect liquidity and risk.
3. Calculation: The borrowing base equals the sum of (eligible collateral × advance rate). Example: $100,000 of eligible collateral at an 85% advance rate yields an $85,000 borrowing base.
4. Availability: The loan or line of credit available to the borrower cannot exceed the borrowing base. If collateral value falls, the available credit falls; if it rises (subject to limits), availability can increase.

Why lenders use borrowing bases
* Risk control: Loans are secured by identifiable assets, reducing unsecured exposure.
* Dynamic protection: Regular redeterminations and monitoring let lenders respond to declines in collateral value.
* Alignment of incentives: Borrowers are encouraged to maintain asset quality and accurate reporting.

Operational mechanics and monitoring
* Reporting: Borrowers usually supply periodic reports (e.g., weekly or monthly), including receivables aging, inventory schedules, and collections data.
* Borrowing base certificates: Lenders often require signed certificates that list eligible collateral and calculations supporting the borrowing base.
* Audits and appraisals: Lenders may perform site visits, physical inventory counts, appraisals, or audits to verify collateral and adjust advance rates.
* Redeterminations: Borrowing bases are redetermined on a set schedule (annually or more frequently) or when significant events occur (asset sales/acquisitions, material declines in collateral).

Example
A publicly reported example: a company’s revolving credit facility included an annually redetermined borrowing base. On one redetermination, the lender reduced the borrowing base from $3.4 billion to $3.2 billion, demonstrating how changes in asset values or lender assessment can immediately affect available credit.

Bottom line

A borrowing base is a fundamental tool in asset-based lending that translates collateral values into a usable credit limit. It protects lenders through advance rates and ongoing monitoring while providing borrowers flexible access to capital tied to their assets. Regular, accurate reporting and periodic revaluation are essential to maintaining an appropriate and reliable borrowing base.