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What is Credit?

  1. Credit
  2. Credit Analysis
  3. Zero Liability Policy
  4. Borrowing Base
  5. Merton Model

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Borrowing Base: Definition & Calculation

Updated: November 25, 2022

The borrowing base is the largest sum that can be borrowed for an asset-based loan depending on the value of the company’s collateral.

Lenders typically offer financing depending on a discount factor rather than lending equal to 100% of the value of the collateral. The borrowing base is calculated by multiplying the worth of the collateral by this discount rate or advance rate.

Read on as we take a deeper look at everything to do with the borrowing base.

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    KEY TAKEAWAYS

    • A borrowing base is the total sum of money that a creditor is willing to loan to a company. 
    • You can determine the total sum by the value of the collateral that the company puts forward.
    • A method known as “margining” determines the borrowing base.

    What is a Borrowing Base?

    A borrowing base is an important tool for lenders as it allows them to assess the amount of money borrowed against collateral. You calculate this figure by taking the value of eligible collateral and subtracting any outstanding loans.

    Creditors have to be careful when it comes to giving out loans. So having a borrowing base will give lenders a greater sense of security. This is because they’re backed up by a specific set of assets.

    You can also adjust a borrowing base downward in order to protect the creditor. So for example, if the market value of the collateral goes down, the credit limit will go down alongside it.

    But this works the other way around as well. If the value of the collateral goes up, then the borrowing base will also go up. Although most borrowing base agreements will have a predetermined limit. The value of the collateral gets checked at regular intervals.

    Asset-based lending can be tricky to figure out. On the one hand, the company that is borrowing needs the money to forward their business interests. On the other hand, the creditor wants to be sure that they aren’t left out of pocket.

    That’s where a borrowing base comes into play. Read on to find out more about this method of loan valuation.

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    Steps to Calculate a Borrowing Base

    1. First, determine the value of eligible collateral. This may include inventory, accounts receivable, or another type of asset.
    2. Subtract any outstanding loans from the value of the eligible collateral.
    3. The resulting figure is the borrowing base.

    Lenders will typically re-assess the borrowing base on a regular basis in order to ensure that they are not overextended.

    If inventory levels increase, the borrowing base will increase, as well.

    It’s important to note that borrowing base numbers will fluctuate based on the value of the collateral.

    For example, if inventory levels increase, the borrowing base will increase, as well. Lenders will typically re-assess the borrowing base on a regular basis in order to ensure that they are not overextended.

    What is a Borrowing Base Certificate?

    A borrowing base certificate is a document prepared by a lender in order to certify the amount of money borrowed against collateral.

    This document will list the value of eligible collateral and subtract any outstanding loans.

    The resulting figure is the borrowing base.

    A borrowing base certificate is an important tool for both lenders and borrowers.

    It helps lenders ensure that they are not overextending themselves. And it helps borrowers stay informed about their financial situation.

    Borrowers should keep track of their borrowing base certificate and make sure that they are aware of any changes to the borrowing base.

    When is Borrowing Base Used?

    A borrowing base is the total sum of money that a creditor is willing to loan to a company. You determine the total sum by the value of the collateral that the company puts forward.

    A method known as “margining” determines the borrowing base, or the credit limit. This is where the creditor figures out a discount factor.

    The discount factor is then multiplied by the company’s collateral value. The figure that comes from this will then represent the total amount of money that the creditor will lend to the company.

    Credit facilities will ask a borrower to provide certain information before agreeing to a loan. This includes their data on their accounts receivable, collections, and inventory.

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    How to Monitor a Borrowing Base

    A borrowing base is an important tool for lenders, but it is also important for borrowers to monitor their borrowing base.

    Borrowers should stay up-to-date on the value of their collateral and make sure that they are aware of any changes to the borrowing base.

    It is also a good idea for borrowers to keep track of their outstanding loans and compare this figure to the borrowing base.

    This will help ensure that they are not borrowing more money than they can afford to repay.

    Monitoring the borrowing base is a good way for borrowers to stay informed about their financial situation. They can make sure that they are not overextending themselves.

    Borrowing Base Example

    Let’s say that Company X is looking to take out a loan. This is so that they can build a stronger base for equipment and a stronger base for inventory. They approach Creditor Y with a collateral offering worth $100,000 for a potential loan.

    Creditor Y then determines a discount factor of 75%. Now we can use the borrowing base formula to figure out the base requirements for how much money Creditor Y will offer to Company X:

    BB = 0.75 x 100,000

    BB = 75,000

    This shows that Creditor Y will offer Company X a maximum credit of $75,000. You base the maximum loan credit agreement on the value of their collateral and the discount factor that the creditor determined.

    These two companies can now enter a borrowing base agreement based on this borrowing base calculation.

    Summary

    A borrowing base is the value of eligible collateral minus any outstanding loans. It is important to note that the borrowing base is not a static number. It will fluctuate based on the value of the collateral.

    Lenders will typically re-assess the borrowing base on a regular basis in order to ensure that they are not overextended.

    Borrowers should stay up-to-date on the value of their collateral and make sure that they are aware of any changes to the borrowing base. This will help ensure that they are not borrowing more money than they can afford.

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    Borrowing Base FAQs

    What is a borrowing base advance rate?

    A borrowing base advance rate is the maximum percentage of the current agreement that the creditor can make available as a loan.

    What is a borrowing base deficiency?

    A borrowing base deficiency is when the aggregate Total Exposures of the creditor exceeds the borrowing base that is in effect.

    What is the borrowing base percentage?

    A borrowing base percentage is the discount factor that creditors will apply when calculating the loan amount. The normal industry standards tend to fall between 75-85% for accounts receivable. For inventory, it tends to be between 25-60%.

    What are some factors that can impact the borrowing base?

    The value of the collateral and the amount of outstanding loans are two of the main factors that can impact the borrowing base.

    Is the borrowing base a static number?

    No, the borrowing base is not a static number. It will fluctuate based on the value of the collateral.

    What is Credit?

    1. Credit
    2. Credit Analysis
    3. Zero Liability Policy
    4. Borrowing Base
    5. Merton Model

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