A borrowing base is the amount a business may draw on an asset-based line of credit, calculated as eligible receivables and inventory multiplied by advance rates set by the lender, less reserves. Oceanline Loans, a small-business funding broker in Idaho Falls, Idaho, explains the calculation and the certificate; lending partners set the actual rates and terms.
| Used on | Asset-based lines of credit and inventory lines |
|---|---|
| Built from | Eligible receivables and inventory times advance rates |
| Reported on | A borrowing base certificate, often monthly |
| Advance rates | Set by each lender; none here are offers |
The idea in one sentence
A borrowing base line lets a business borrow against what it owns that can be turned into cash, with each type of asset counted at a discount, and the amount available rises and falls as those assets do.
What is a borrowing base line of credit?
An asset-based line of credit is a revolving line secured mainly by working assets: accounts receivable and inventory, sometimes equipment. Instead of being sized once from revenue or credit history, availability is recalculated regularly from the assets themselves. The agreement sets a maximum line amount; the borrowing base sets how much of it you can use right now. You may draw the lower of the two.
Retailers, wholesalers and distributors meet borrowing bases most often, because their balance sheets are mostly stock and receivables. In Bonneville County, retail trade had 517 employer establishments and wholesale trade 201 in 2023 (U.S. Census Bureau, County Business Patterns 2023), the kinds of businesses for which this structure is common. It is closely related to inventory financing.
Eligible and ineligible assets
Not everything on the balance sheet counts. The lender defines which assets are eligible. Common exclusions:
- Receivables past a set age, owed by related companies, owed by customers with large past-due balances, or subject to disputes or offsets.
- Inventory that is obsolete, slow-moving, consigned, held off-site without the lender's consent, or still work in progress.
- Any asset already pledged to another creditor.
Eligibility rules matter as much as advance rates. A generous advance rate on a narrow definition of eligible inventory can produce less availability than a modest rate on a broad one.
Advance rates and reserves
An advance rate is the percentage of an eligible asset's value the lender will lend against. Receivables usually carry a higher advance rate than inventory because they turn into cash more directly. Inventory is usually valued at cost or at an appraised liquidation value, whichever the agreement specifies. Lenders may also hold back reserves, amounts subtracted from the base for specific risks such as rent owed on a warehouse or taxes that rank ahead of the lender.
Advance rates are set lender by lender and asset by asset. The numbers in the example below are invented to make the arithmetic easy to follow. They are not typical, and they are not an offer.
Borrowing base calculation example
A hypothetical distributor has an asset-based line with a maximum of $500,000. At month-end its books show:
| Line | Amount | How it is worked out |
|---|---|---|
| Total receivables | $300,000 | From the aging report |
| Less ineligible receivables | -$40,000 | Over age or disputed |
| Eligible receivables | $260,000 | $300,000 - $40,000 |
| Receivables availability at an invented 75% | $195,000 | $260,000 x 0.75 |
| Total inventory at cost | $250,000 | From the stock report |
| Less ineligible inventory | -$50,000 | Slow-moving and obsolete |
| Eligible inventory | $200,000 | $250,000 - $50,000 |
| Inventory availability at an invented 40% | $80,000 | $200,000 x 0.40 |
| Less reserves | -$15,000 | Set by the lender |
| Borrowing base | $260,000 | $195,000 + $80,000 - $15,000 |
Although the line's maximum is $500,000, the distributor can borrow only $260,000. If it has already drawn $230,000, remaining availability is $30,000. If the borrowing base falls below the amount drawn, for example because a large customer pays late and its invoices age out, the business is over-advanced and usually must repay the difference promptly.
What is a borrowing base certificate?
A borrowing base certificate is the form the business completes, usually monthly and sometimes weekly, to report the assets behind the line. It lists total receivables and inventory, subtracts ineligible amounts, applies the advance rates and reserves, and arrives at current availability. An officer of the business signs it, attesting that it is accurate. Lenders check certificates against aging reports, stock reports and periodic field exams or inventory audits.
Keeping the certificate accurate is not just paperwork. Overstating eligible assets, even by mistake, can put the line in default.
How inventory turnover affects the base
Lenders care how quickly inventory sells, because stock that turns slowly is harder to liquidate and may be excluded as slow-moving. A business that knows its own turnover can predict how much of its stock will count. The inventory turnover worksheet shows how to calculate turns and days on hand from your books.
When a borrowing base line fits
It suits businesses with substantial receivables or stock whose needs grow with sales: as sales rise, receivables and inventory rise, and so does availability. It fits less well for service businesses with few tangible current assets, or for owners who cannot keep up with regular reporting. Other ways to structure a business line of credit exist, and more guides are in the guide library.
By Oceanline Loans · Updated