Borrowing base refers to the maximum amount of funds that can be borrowed based on the value of collateral being pledged for the loan. It is calculated by multiplying a lender’s advance rate or loan-to-value (LTV) threshold by the value of the collateral. For example, if a lender has an advance rate of 80% and you have collateral worth $100,000, you can potentially borrow up to $80,000.
Some lenders may provide a discount rate instead of an advance rate, but the methodology is similar. With a discount rate, the value of the collateral is reduced by a certain percentage, and the resulting figure is your borrowing base.
For an easier time, use our borrowing base calculator. Just input the value of your collateral and your provider’s LTV threshold, then wait for it to come up with your estimated borrowing base.
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 more than 75 lenders in its network and can issue $750,000 or more in funding in as little as 24 hours.
Examples of How to Calculate Borrowing Base
Below are two examples of how to calculate borrowing base. We’ve provided figures for how to calculate the borrowing base using either the advance rate or discount rate, depending on which one a lender discloses.
You may see lenders refer to LTV, advance rate, and a discount rate:
- The LTV and advance rate are often used interchangeably and are the same. See our LTV guide 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
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) |
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 in 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).
Borrowing Base Monitoring
When you get an asset-based loan that uses a borrowing base agreement, most lenders will require you to update the borrowing base certificate periodically.
The borrowing base certificate is important paperwork that lists the applicable asset and its assessed value and will show the advance rate being used in the calculation of the borrowing base. Lenders may issue a certificate to document the type and collateral being used for your loan.
Collateral can fluctuate in value, so this is done to ensure that your outstanding loan amount is still within the limits of the original borrowing base agreement. If you find that the value of your collateral has dropped below acceptable levels, then you’ll typically be expected to pay down the balance of the loan to remain compliant. The period you’ll be given can vary from lender to lender and should be outlined in the terms of your loan agreement.
Why It’s Helpful to Know 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?
The borrowing base is just one of several items that determine whether you can get approved for a loan, as well as the rates and terms you’ll get. Head over to our guide on small business loan requirements for other common eligibility criteria.
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 (CRE), 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 equipment financing is.
- A/R financing: If you have issued invoices to clients and are awaiting payment, A/R 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 A/R financing is.
- Invoice financing: Similar to A/R 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 A/R 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.
Regardless of which type of asset-based loan you get, be sure to check out our guide on how to get a small business loan for insights on what steps you’ll need to take to get a loan.
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.
