What is a borrowing base?
A borrowing base is the amount of money a company can borrow from a lender. Fintechs and other companies that rely on asset-based borrowing need to calculate and report on their borrowing base on a regular basis to maintain access to their debt line. Lenders calculate the borrowing base amount by adding up all the assets that a borrower can put up as collateral (cash, inventory, and accounts receivable, for instance) and then “margining”, or applying a discount factor, to arrive at a maximum loan amount. Think of a borrowing base as a credit limit that's a bit lower than a borrower's total collateral.
How do you calculate a borrowing base?
You can calculate a borrowing base by starting with the the amount of different types of collateral your business has and then discounting those amounts by a rate specified by your lender. Then, you simply sum up the discounted amounts.
When dealing with a borrowing base for the first time, we've found that it's helpful to think about the consumer analogue. Let’s say you have $50,000 in your bank account and are also owed $50,000 for a freelance project. You would probably be able to get a loan of $50,000 from many lenders, because you can use the money in your bank account as collateral. Cash is a safe type of collateral, both because it's fungible and because lenders know exactly how much it's worth. In that instance, your collateral would fully cover the amount of the loan.
But the amount of money you are owed might also be used as collateral. Of course, there's a chance you might not end up receiving the payment you're owed, so your lender might discount it by some amount in order to make up for that risk. For example, your lender might count the $50,000 you are owed as $30,000 in collateral, and let you borrow up to $80,000. In that case, your borrowing base calculation would be $50,000 (your cash in the bank) plus $30,000 (the “eligible” collateral amount, as deemed by the lender, of the money you are owed). Again, your total borrowing base would simply be the amount you can borrow, or $80,000.
Now, think about this in terms of a company trying to get a loan from a lender. The company might add up its cash, IOUs, and inventory and arrive at a total collateral amount. But that total collateral amount would have to be discounted by some amount in order to arrive at an actual borrowing base. In other words, lenders tend to start with a total collateral amount and arrive at a borrowing base (or maximum credit amount) that is lower.
The variability of a company’s sales, receivable, and inventory information means that a company’s borrowing base can fluctuate from day to day. That’s why, when lenders issue large loans to companies, they ask for regular borrowing base updates that show the most recent information on every aspect of a company’s total collateral. The precise borrowing base formula in a debt deal is determined in the credit agreement signed by the borrower and capital provider.
What is a borrowing base certificate?
A borrowing base certificate is a company update (prepared by a borrower for submission to a lender) that discloses all relevant changes in a company’s total collateral status. For a middle-market company, a borrowing base certificate might include things like the company’s total available funds, the status of the company’s eligible receivables, and changes in the company’s inventory. Because the borrowing base certificate is an official accounting document, it typically needs to be signed by a finance leader within the borrower's organization (e.g., CFO).
As companies grow, borrowing base certificate generation can become a bottleneck in their ability to access debt capital. This is especially true in asset-backed lending, where a borrowing base certificate might need to include up-to-date receivable information from across a number of different data sources.
Automating borrowing base certificate generation can help your company maximize its capital access by preventing delays in the draw process, maximizing your effective advance rate, and ensuring that your lender is counting your total collateral accurately. Moreover, using debt capital management software like Finley can help you automate the regular borrowing base reporting process and give you visibility into your borrowing base on an ongoing basis. That way, you can flag any potential issues for internal or external review early on.
What is a collateral report?
A collateral report is a document that shows the up-to-date status of all of a company's assets. The terms collateral report and borrowing base certificate are often used interchangeably, though it's helpful to think of a borrowing base certificate as a specific type of collateral report.
Often, a capital provider will provide a borrowing base certificate template for their borrowers after a debt raise is completed. In additional to this borrowing base certificate, a capital provider might also ask for other types of collateral reports throughout the lifecycle of a credit facility.
Want to learn more?
After businesses raise debt capital successfully, their challenge shifts from accessing debt capital to making sure they’re making the most of their credit facility. When it comes to borrowing base reporting and borrowing base certificate generation, the only way to guarantee timely and accurate reporting is to rely on technology designed to ingest financial data and export accurate, up-to-date borrowing base reports.
If you're interested in learning more about software that can help you scale your capital markets function, or in need of a borrowing base certificate form, just request a demo or take a self-guided product tour. If you have an existing loan tape and are about to close an asset-backed credit facility, we'd also be glad to offer advice on formatting your borrowing base certificate template in Excel, debt capital compliance monitoring, and other post-close best practices.