The borrowing base Excel spreadsheet

The borrowing base is one of the most important concepts in corporate lending, and it's especially critical in asset-backed finance. When companies take out large loans (think $50 million and over) backed by a set of assets as collateral, their lenders want to check in at a regular cadence and make sure the value of that collateral hasn't changed significantly.

The borrowing base Excel spreadsheet is what borrower and lenders in asset-backed financing arrangements use to track the changing value of a pool of collateral over time, and to alert both sides to any significant changes in collateral adequacy.

The debt capital borrowing base
The debt capital borrowing base

As we covered previously, borrowing base calculations take into account a borrower's total pool of assets and the advance rate that a corporate borrower and lender have agreed to in their credit agreement.

Here, we'll show you what a borrowing base Excel spreadsheet looks like and what risks to watch out for as you manage your own borrowing base.

Why lenders want to see up-to-date borrowing base reports

Before we take a closer look at what goes into a borrowing base Excel spreadsheet, and how companies can use technology to streamline borrowing base reporting, let's set up a hypothetical lender-borrower example:

Let's say the fictitious company Pacifica Aircraft Inc. has borrowed $200 million from a bank in order to expand its operations globally. The loan might be backed by $250 million of collateral in a combination of aircraft, publicly traded stocks (held by Pacifica), Pacifica's own IOUs (perhaps the company itself is owed payments by others), cash, and other assets.

A company's borrowing base composition is likely to vary based on what industry it's in: for a company in the lending industry, a borrowing base is likely to include the loan repayments that company expects from its customers; for a company in the aviation industry, a borrowing base could include a fleet of aircraft.

Borrowing base collateral can include a number of asset types, including a vehicle fleet | Image source: Unsplash
Borrowing base collateral can include a number of asset types, including a vehicle fleet | Image source: Unsplash

Verifying collateral adequacy is essential to protecting the bank's investment in Pacifica. If Pacifica is unable to repay the loan, the bank is able to take the collateral and still not lose any money on its investment.

But what if, over the course of a week, Pacifica's borrowing base were to decline significantly in value, perhaps by $100 million? This could happen if Pacifica's fleet of aircraft disappears in the Bermuda triangle, the stocks held by Pacifica saw a sharp price drop, or if the companies that owe Pacifica money go out of business. In each case, the borrowing base would shrink significantly. For our example, let's imagine that the value of Pacifica's collateral is now $150 million.

Pacifica would still have a $200 million loan outstanding with the bank, but that loan would be undercollateralized and there would be a borrowing base deficiency. That puts the bank in a risky position; now, if Pacifica's unable to repay the loan, the bank could stand to lose $50 million, even if it takes the full value of Pacifica's collateral! In response to this risk (and in keeping with the rules of the prenegotiated credit agreement), the bank might ask Pacifica to provide more collateral or pay down a portion of its outstanding loan.

This type of situation is why lenders insist on receiving regular borrowing base updates, and why verifying borrowing base accuracy is so important for both borrowers and lenders. Lenders want to know that their loan is safe; borrowers want to know that they are not in danger of losing access to their loan.

The borrowing base Excel spreadsheet serves many functions

For those with technical or software backgrounds, it can be helpful to think of a borrowing base Excel spreadsheet as a static file that performs functions typically separated in software architecture: database, workflow automation, data validation, and alerting all in one. We include a few examples of these types of borrowing base data below:

The borrowing base Excel spreadsheet aggregates and provides alerts on collateral data
The borrowing base Excel spreadsheet aggregates and provides alerts on collateral data

Aggregation of collateral values. The Excel spreadsheet takes in data from across different types of collateral and aggregates them in one place. This is usually done by having separate Excel sheets in one master Excel file. In order to track versions or historical values of collateral data, some lenders and borrowers will add many sheets of historical data and compare these against one another.

Alerting of borrowing base deficiency. As highlighted in the example above, the regular transfer of the borrowing base Excel spreadsheet allows for formula-based alerting (either early warnings or alerts of actual borrowing base deficiencies) on the health of the investment. Borrowing base Excel spreadsheets typically have a "top sheet" or "summary sheet" that includes formula-driven alerts (e.g., a cell in the summary sheet might be configured to turn red if the borrower has drawn more from a credit facility than they should be able to).

Certifications of borrowing base accuracy. Because the borrowing base Excel spreadsheet is delivered regularly over email, the submission of the borrowing base (either individually or as part of a funding request) often requires the borrower and lender to agree on the accuracy of a borrowing base report at regular intervals and when funding activity occurs. That's why borrowing base spreadsheets might include a sheet for tracking the generation of compliance certificates over time.

Tracking borrowing bases with Excel is labor-intensive and error-prone

At Finley, we've helped dozens of borrowers and lenders automate and digitize their borrowing base processes around reporting in order to streamline funding operations and secure their investments. While we've seen a remarkable amount of ingenuity in the way borrowing base Excel spreadsheets are set up, we've also seen a few key weaknesses in relying solely on Excel for borrowing base management.

For borrowers, borrowing base Excel spreadsheets are cumbersome to prepare and aggregate, and cannot serve as a source of truth. The source system for data around borrower assets, whether those assets are stocks, inventory, or IOUs, is not the borrowing base Excel spreadsheet. Rather, it depends on the assets included in the borrowing base and includes financial accounting software, inventory management systems, loan management systems, etc. The transfer of data from these systems to a borrowing base report is time-consuming and error-prone. So it is easy to introduce errors into a borrowing base when preparing a borrowing base report, and extremely difficult to reconcile data issues between different data sources and time periods (especially when comparing say, a July 2022 borrowing base report to an August 2022 data export from source systems). That's why thorough audits of borrowing base activity often uncover weeks or months of discrepancies between lender records and borrower records.

For lenders, borrowing base Excel spreadsheets are hard to validate and verify. Borrowing base spreadsheets are lagging indicators of borrower health and often contain data inaccuracies. For lenders, managing and maintaining a portfolio of borrowers means receiving and processing dozens, if not hundreds, of borrowing base reports each week. It is impractical to check every cell of a borrowing base spreadsheet for accuracy, so lenders often rely on top sheet formulas and Excel's built-in data validation to verify that a borrower has reported their borrowing base accurately. Unfortunately, these mechanisms are incapable of catching common borrower data errors like mismatched data types or errors in upstream calculations, and cannot be used to cross-reference borrower data against a third-party data source. That can mean tens or hundreds of millions of dollars in mispriced borrower risk, per private credit deal.

In future posts, we'll walk through each of these weaknesses in depth, and explain how technology enables borrowers and lenders to more reliably generate, verify, and provide alerting on borrowing base data over time.

Want to learn more?

Finley is debt capital management software that helps high-growth startups save time and money by automating routine credit facility management tasks like borrowing base reporting, verification, and alerting. Today, Finley manages over $2 billion in debt capital for high-growth startups like Ramp, Parafin, and Arc. If you're interested in learning more about software that can help you streamline your debt capital raise and management, just request a demo or take a self-guided product tour of Finley. We'd love to chat!

All information presented herein is for informational purposes only, and Finley Technologies, Inc. does not assume any liability for reliance on the information provided. Before making any decisions that may affect your business, you should consult a qualified professional advisor.

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