Borrowing base is a figure that refers to the largest loan amount you can get from a lender. It applies to secured loans and is calculated by taking the lender’s advance rate (sometimes also referred to as its loan-to-value limit) and multiplying it by the value of the collateral.
As an example, if you have collateral worth $100,000 and a lender’s advance rate is 80%, you’d potentially be able to borrow up to $80,000. Alternatively, you can also use our borrowing base calculator below.
A borrowing base is typically used for asset-based loans. If you’re in the market for this type of loan, you can check out Clarify Capital. It is a broker with over 75 lenders in its network and can issue $5 million or more in funding in as little as 24 hours.
Borrowing Base Terminology
If you’re trying to figure out your borrowing base, you’ll find that lenders may disclose either a loan-to-value (LTV) ratio, advance rate, or discount rate. These figures are related to one another, and can help you find your borrowing base as follows:
- The LTV and advance rate are often used interchangeably and are one and the same. See our LTV guide and calculator to learn more about how this figure is determined.
- The discount rate is calculated by taking 100% and subtracting the LTV.
- Similarly, the LTV can be calculated by taking 100% and subtracting the discount rate.
Borrowing Base Example
To illustrate how the borrowing base can be calculated, we’ve provided two examples below. These examples also cover scenarios in which either a lender’s LTV, advance rate, or discount rate is provided.
Discount Rate Calculation | LTV Calculation | |
|---|---|---|
LTV or Advance Rate | (Assuming figure is not provided by lender) | 90% (determined by lender) |
Discount Rate | 10% | (Assuming figure is not provided by lender) |
Value of Collateral | $50,000 | $50,000 |
Borrowing Base Calculation |
| $50,000 x 90% LTV = $45,000 (borrowing base) |
Borrowing Base Input Considerations
Finding your borrowing base only requires you to know the value of the collateral and a lender’s advance rate. Each has its own nuances as to how they’re determined.
How the Advance Rate Is Determined
The advance rate you get will primarily be determined by three factors:
- Type and value of your collateral: Collateral that has a high value can allow you to borrow more. Some examples of eligible types of collateral can include inventory, equipment, and accounts receivable (A/R).
- Your business qualifications: Businesses with strong credit and finances have a better chance of getting more favorable advance rates to borrow more money. Common qualifications can include time in business, revenue, and credit score.
- Lender and loan policies: Regardless of how well-qualified your business is, some providers and loan programs may have limits for advance rates or financing amounts. You should take this into consideration to ensure that you can get the amount of funding needed.
How to Determine the Value of Your Collateral
Eligible types of collateral can include equipment, inventory, and A/R. Each has a slightly different methodology for determining the value that can be used for purposes of calculating the borrowing base.
- Equipment: In most cases, the current value of the equipment being used as collateral for the loan is the figure that will be used in calculating the borrowing base. This will most likely be different from the price you initially paid for the equipment, as you’ll need to account for depreciation.
- Inventory: For purposes of calculating your borrowing base, the value of your inventory is what it would sell for today. This figure will most likely differ from the price you initially paid to acquire the inventory and can fluctuate over time as market conditions can impact its assessed value. For an asset-based loan where a borrowing base needs to be determined, it’s not uncommon for lenders to need to physically inspect your inventory as part of the lending process.
- A/R: A/R due within 90 days can typically be included as part of the valuation process for your borrowing base. However, the specific time frame can vary from lender to lender. Some may also have restrictions on which A/R accounts are eligible based on certain criteria—such as the customer’s creditworthiness and whether the accounts are business-to-business (B2B), business-to-consumer (B2C), or business-to-government (B2G).
When Borrowing Base Is Used
Borrowing base is typically used for loans secured by an asset. Assets can include things like real estate, equipment, inventory, A/R, or anything that the lender deems to be acceptable collateral for the type of financing being issued.
- Real estate financing: This type of financing is a loan that is secured by land or buildings. Some examples can include residential mortgage loans and commercial real estate—which we discuss more in our article on investment property financing. It can come in the form of a closed-end loan, where funds are issued in a single lump sum, or as a revolving line of credit, where you have the flexibility to draw funds on an as-needed basis.
- Equipment financing: Equipment financing allows you to obtain business-related equipment. Common types of equipment eligible to be used as part of a borrowing base can include vehicles, machinery, furniture, computers, and more. Since business equipment depreciates in value, you’ll typically be expected to provide an updated borrowing base certification periodically. You can have the option of a loan or lease in this case. Learn more about these in our guide on what is equipment financing.
- A/R financing: If you have issued invoices to clients and are awaiting payment, AR financing allows you to receive an advance on the amounts owed to you. Learn more about costs, terms, and other qualification requirements in our discussion on what accounts receivable financing is.
- Invoice financing: Similar to AR financing, invoice financing allows you to borrow funds against your outstanding invoices. It can be a good option if you have issued invoices to clients but need funds more quickly. Unlike AR financing, where clients make payments to you, invoice financing requires that your clients make payments to the invoice financing company. Once the company receives payment, it will issue your business final payment, less any applicable fees for the loan. Head over to our guide on invoice factoring for more details on how this works.
- Inventory financing: With inventory financing, the value of your existing or future inventory can be used as a borrowing base. This may require a physical inspection to determine the value and condition of the inventory, as well as frequent updates to the borrowing base certification.
- Other assets: Although rare, assets that do not fit any of the above categories can be used for borrowing base. Since this is less common than other types of financing, a lender may need an independent professional appraiser to determine the value of the assets being used for the loan.
Borrowing Base Agreements, Monitoring & Certificates
Since collateral that’s pledged for a loan can fluctuate in value over time, some lenders may monitor this regularly to ensure it still sufficiently covers your loan balance. You may be required to sign a borrowing base agreement, a document that indicates the minimum acceptable collateral value based on your loan balance. If you’re not in compliance, you may be required to pay down the balance of your loan.
Lenders that have this requirement often use a borrowing base certificate, which shows details of the asset’s value, outstanding loan amount, borrowing base, and advance rate. These certificates may then need to be updated regularly to ensure adherence to the borrowing base agreement.
Benefits of Knowing Your Borrowing Base
Knowing your borrowing base can help you determine if a lender is right for you. By knowing the value of your collateral, you can figure out if you can get the funding amount you need. If your agreement with the lender requires periodic updates on the value of the collateral, it can also inform you as to how much the value is allowed to drop.
If you’re considering a loan with a borrowing base agreement, think about the following:
- Will you be able to get enough funding?
- Is the value of your collateral sufficient?
- How frequently will you need to update the borrowing base certificate?
- What options do you have if the value of your collateral falls below the borrowing base agreement requirements?
Limitations of Borrowing Base
Borrowing base is just one of several criteria that a lender can use in determining whether you get approved for a loan, as well as the rates and terms you’ll get. Other important items commonly include a review of your credit, business characteristics, income, and financial ratios.
For details on other areas lenders typically evaluate, head over to our guide on small business loan requirements.
Frequently Asked Questions (FAQs)
The borrowing base tells you how much of a loan you can get. If it’s not sufficient for your needs, you may need to find a different lender or ask for an explanation of how your collateral’s value was determined.
A borrowing base is typically used for secured loans. Common examples include real estate loans, vehicle loans, equipment financing, and invoice financing.
You can improve your borrowing base by providing collateral that has a higher value. If you’ve made upgrades or enhancements that would result in a higher valuation, be sure your lender is aware of it, as it may require an appraisal or other type of inspection to confirm its current market value.
Bottom Line
Borrowing base is an important figure to know as it will determine the maximum amount of financing you can get. Its value varies depending on the lender, the loan program, and your business qualifications. Knowing how this figure is calculated can help you find the loan best suited for your business needs.
