Glossary
Borrowing base
Borrowing base (base d’emprunt)
The borrowing base is the maximum amount an asset-based lender agrees to finance, calculated from the borrower’s eligible receivables and inventory.
Definition
The borrowing base is the limit a lender sets on a credit facility according to the value of the assets given as security. It structures asset-based lending (ABL), which combines revolving facilities backed by current assets and amortising loans backed by fixed assets. These facilities serve large borrowers, in restructuring or buyouts, and syndication among several lenders is common for large amounts. The formula starts from gross assets, removes ineligible assets, applies an advance rate per category and deducts reserves. Depending on the contract, the ineligibility criteria cover invoices more than 60 days past due or issued more than 90 days earlier, intragroup receivables, customers that are also suppliers, disputed invoices and customers in insolvency proceedings. A concentration limit caps the share of a single debtor at 10% to 20% of eligible receivables. The borrower delivers a borrowing base certificate, monthly in normal times, weekly or even daily when risk increases. The lender carries out one or two field audits a year to reconcile the certificates with the accounts. The amount of the base tracks activity, since each new invoice increases it and each collection reduces it. If drawings exceed the base, the borrower repays the excess or provides additional assets.
Worked example
A distributor holds €120m of gross receivables and €90m of inventory. The lender excludes €15m of invoices more than 60 days past due and €5m above the concentration limit, leaving €100m of eligible receivables, and accepts €75m of eligible inventory. With advance rates of 85% and 60%, the base reaches €85m plus €45m, or €130m, from which the lender deducts a dilution reserve of €4m: €126m.
Points to check
- Negotiate the definition of eligible assets, category by category, before discussing the advance rate.
- Have the concentration limit raised for your leading customers.
- Check the frequency of the certificate and the events that move it to a weekly cycle.
- Set limits on the lender’s power to introduce new reserves.
- Fix the number of field audits charged to you each year.
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