Borrowing Base Explained

Step-by-Step Example

Here is a full borrowing base calculation for a hypothetical manufacturer with a $1,500,000 line:

• Total receivables of $1,200,000, less $200,000 ineligible, leaves $1,000,000 eligible. At 85 percent, receivables support $850,000.

• Inventory of $900,000 at cost, less $100,000 of obsolete and consigned stock, leaves $800,000 eligible. The appraiser puts NOLV at 75 percent of cost, or $600,000. At 80 percent of NOLV, inventory supports $480,000.

• The agreement caps inventory at $400,000, so only $400,000 counts.

• Gross availability: $850,000 plus $400,000 equals $1,250,000.

• Less a $50,000 rent reserve for a leased warehouse: $1,200,000.

• The lower of $1,200,000 and the $1,500,000 commitment is $1,200,000.

• With $900,000 already drawn, excess availability is $300,000.

Notice that the company has a $1,500,000 line and $2,100,000 of gross receivables and inventory, yet it can borrow only $1,200,000 in total.

Why Your Availability Changes

• Sales and collections. New invoices add to the pool, and payments remove the invoices they settle.

• Aging. Invoices that slide past the eligibility cutoff drop out, even if you expect to collect them.

• Seasonality. Inventory builds before a peak and receivables rise during it, so availability follows the cycle.

• Appraisals and field exams. A lower NOLV or exam findings can cut advance rates or add reserves.

• Customer problems. A major customer that pays late or files for bankruptcy can remove a large block of eligible receivables at once.

If outstanding loans exceed availability, you are over-advanced and usually must repay the difference promptly. Some agreements allow planned seasonal over-advances, but the OCC notes most banks do not allow them beyond 10 to 15 percent of the base.

Frequently Asked Questions

How often is the borrowing base recalculated?
Whenever you submit a new collateral report, which may be monthly, weekly or even daily depending on your risk profile and the agreement. Some lenders update availability daily from collections and new invoices.

Can I negotiate the formula?
Yes, at least at the start. Advance rates, eligibility definitions, inventory caps and the lender's right to add reserves are all negotiable, and small wording changes can shift availability noticeably.

Does a bigger line mean more cash?
Not on its own. You can only draw what your eligible collateral supports, up to the line limit.

See What Your Collateral Can Support

Knowing how your borrowing base is built lets you compare offers on real availability instead of headline line size. Run your own numbers through each lender's formula, and choose the facility that gives you the most usable cash at a cost and reporting load you can manage.

A borrowing base is the formula a lender uses to cap how much you can draw on a collateral-backed line of credit. It takes the value of your eligible assets, usually receivables and inventory, multiplies each by an advance rate, and subtracts reserves. The result, not the size of the credit line on paper, is what you can actually borrow on any given day.

Because the formula is recalculated as your collateral changes, availability moves with your business. Understanding each piece of the calculation helps you forecast cash, avoid surprises and negotiate better terms.

The Basic Formula

Most agreements follow the same structure:

1. Start with gross collateral, such as total receivables and total inventory.

2. Subtract ineligible items that the lender will not lend against.

3. Multiply each eligible pool by its advance rate.

4. Apply any sublimits or caps, such as a maximum amount of inventory.

5. Subtract reserves the lender holds back for specific risks.

Your availability is then the lower of that figure and the total commitment on the line. Subtract what you have already borrowed and you get excess availability, the cushion you can still draw.

The term also shows up in energy lending, where loans to oil and gas producers are sized against the value of proved reserves and redetermined periodically. The rest of this page covers the receivables-and-inventory version used in most working capital lines.

Advance Rates by Asset Type

Each collateral class gets its own advance rate, set by how quickly and reliably it can be turned into cash. Guidance in the OCC's examiner handbook gives a sense of common ranges:

• Receivables: commonly 70 to 85 percent of eligible accounts, with some banks advancing up to 90 percent on business-to-business invoices.

• Inventory: typically up to 65 percent of book value, or 80 percent of net orderly liquidation value (NOLV). NOLV is an appraiser's estimate of what the goods would bring in an orderly sale after costs.

• Equipment and real estate: included in some facilities, generally limited to a small share of total availability because they are slower to sell.

Finished goods and commodity-type raw materials usually get the best inventory rates. Work in process is often excluded, because it needs more labor and materials before anyone will buy it.

What Gets Excluded From the Calculation

Ineligible collateral is where most of the difference between your balance sheet and your availability comes from. On the inventory side, typical exclusions include:

• Obsolete or slow-moving stock, judged by age or turnover.

• Consigned goods, which belong to someone else.

• Inventory at unapproved locations, such as a third-party warehouse without a waiver from the landlord or warehouse operator.

• Goods in transit that the lender cannot yet control.

• Supplies and packaging, plus work in process under many agreements.

On the receivables side, lenders exclude badly aged invoices, affiliate balances, contra accounts, amounts above concentration limits and other higher-risk items. The page on accounts receivable financing covers those rules in more detail.

Reserves, Sublimits and Blocks

Even eligible collateral can be trimmed further. The most common adjustments are:

• Reserves. Deductions for costs that would come ahead of the lender in a liquidation, such as rent owed at a leased warehouse, unpaid sales or payroll taxes, or expected dilution.

• Inventory sublimits. A cap on how much of total availability can come from inventory, so the line stays anchored to receivables.

• Availability blocks. A fixed amount or percentage that must always stay undrawn. For retail borrowers, the OCC notes that excess availability covenants typically require 10 to 15 percent of the base to remain available.