What is borrowing base?

A borrowing base limits availability under a revolving line of credit to a percentage of the value of specified collateral, typically accounts receivable and inventory. Only eligible collateral counts. Each category is multiplied by an advance rate, and the borrower may draw up to the lesser of the borrowing base or the line commitment.

Borrowers usually report the borrowing base on a borrowing base certificate submitted monthly or more often, with supporting agings and inventory reports. Lenders verify the figures through field exams and audits. Common advance rates are around 70% to 85% for eligible receivables and lower rates for inventory, reflecting how much the lender expects to realize in a liquidation.

Eligibility rules do much of the work. Receivables over 90 days past invoice, amounts owed by affiliates or foreign customers, contra accounts and excessive concentrations in a single customer are commonly excluded. Weak monitoring, outdated certificates and failure to apply cross-aging rules can let the borrower draw more than the collateral supports. Dilution from returns and credits should be tracked and reflected in advance rates.