What is a 'Borrowing Base'

A borrowing base is the amount of money a lender will loan to a company based on the value of the collateral the company pledges. The borrowing base is usually determined by a method called margining, in which the lender determines a discount factor that is multiplied by the value of the collateral. The result is the amount that will be loaned to the company.

BREAKING DOWN 'Borrowing Base'

There are various assets that can be used as collateral, some of them include accounts receivable, inventory, and equipment. If a company goes to a lender to borrow money, the lender will assess the company's strengths and weaknesses, and evaluate the borrower's risk. Based on the risk that the lending company feels is associated with the loan to the company, a discount factor of, say 85%, may be determined. If the borrower is offering collateral that is worth $100,000, the maximum amount the lending company will give the company is equal to 85% of $100,000, or $85,000.

Why Lenders Use a Borrowing Base

With a borrowing base, lenders feel more comfortable making a loan, since it is against specific assets. The assets are typically not used to back other loans, or the lenders will have the first claim. They may even extend more credit under this formula.

The borrowing base can be adjusted downward, protecting the lender. If the value of the collateral falls, the credit limit also declines. Should the collateral increase, the borrowing base will also increase up to a predetermined limit.

The Mechanics

The borrower must provide the lender with certain information to determine the borrowing base. This includes information on sales and collections, along with inventory. Middle-market and large asset-based loans generally require the borrower to give the lender a certificate with detailed calculations, such as which receivables are eligible, if the borrowing base is determined this way. The certificate is delivered periodically, and is spelled out in the credit agreement.

The lenders may also conduct regular investigations. This involves checking the borrower’s business and having an appraiser value the collateral that is used in calculating the borrowing base.

A Real Life Example

Cabot Oil & Gas Corporation did not have any borrowings outstanding under its revolving credit facility as of March 31, 2016. However, its borrowing base is redetermined annually on April 1. The company or banks may request a redetermination semi-annually, or whenever Cabot acquires or sells oil and gas properties. On April 19, 2016, the borrowing base was lowered to $3.2 billion from $3.4 billion.

RELATED TERMS
  1. Collateralization

    Collateralization occurs when a borrower pledges an asset as ...
  2. Additional Collateral

    Additional assets put up as collateral by a borrower against ...
  3. Lender

    A lender makes funds available with the expectation that the ...
  4. Collateral Value

    A collateral value is the estimated fair market value of an asset ...
  5. Security Agreement

    A security agreement is a document that provides a lender a security ...
  6. Secured Note

    A secured note is a type of loan that is backed by the borrower's ...
Related Articles
  1. Personal Finance

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  2. IPF - Mortgage

    What Are the Main Types of Mortgage Lenders?

    Shopping for a mortgage lender can feel confusing and a little intimidating. Understanding the differences among the main types of lenders can help you narrow down the field.
  3. Small Business

    Using Collateral to Obtain a Loan for Your Small Business

    Learn what assets can be used as collateral for an asset-based loan, and find out best practices when seeking asset-based lending.
  4. Personal Finance

    What Is A Mortgage?

    A mortgage is a loan used to purchase a home, where the property serves as the borrower's collateral.
  5. Investing

    How to Get a Loan to Flip a House

    If you want to get into house flipping but don't have the cash to invest, read on for options.
  6. Personal Finance

    8 Cheaper Ways to Raise Cash Than Car Title Loans

    Before you sign up for a car title loan, investigate these eight alternate cash-raising strategies rather than using the value of your lien-free vehicle.
  7. Personal Finance

    The Best Way to Borrow

    There are many ways to secure funding. Find out the pros and cons of each way to borrow.
  8. IPF - Mortgage

    How to Get the Best Mortgage Rate

    A crucial consideration as you shop mortgages is getting the best possible interest rate.
  9. Investing

    Financing Basics For First-time Homebuyers

    If you're buying your first home and getting a mortgage, you have many financing options to sort through.
  10. Personal Finance

    Getting a loan without your parents

    Do you want to receive a loan without the help of your parents? Use these five tips to finance your dreams without banking on a second signature.
RELATED FAQS
  1. Does inflation favor lenders or borrowers?

    Find out under what circumstances inflation benefits borrowers more than lenders and in which situations inflation can be ... Read Answer >>
  2. Asset-Based Lending Vs. Asset Financing

    Is there an actual difference between asset-based lending and asset financing? Read Answer >>
  3. What is the difference between secured and unsecured debts?

    Learn about the differences between secured and unsecured debt — and how banks buffer risks associated with each type of ... Read Answer >>
Trading Center