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, including accounts receivable, inventory and equipment. For example, 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 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 rise, 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, which 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. Advance Rate

    An advance rate is the maximum percentage of the value of a collateral ...
  2. Lender

    A lender makes funds available with the expectation that the ...
  3. Additional Collateral

    Additional assets put up as collateral by a borrower against ...
  4. Asset Financing

    Using balance sheet assets (such as accounts receivable, short-term ...
  5. Secured Note

    A secured note is a type of loan that is backed by the borrower's ...
  6. Stock Loan Fee

    A stock loan fee, or borrow fee, is a fee charged by a brokerage ...
Related Articles
  1. 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.
  2. 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.
  3. 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.
  4. Insights

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  5. Investing

    Homeowners, Beware These Scams!

    If you're in a pinch for money, you're the prime target for con artists and thieves.
  6. Personal Finance

    Purchasing a Home with Bad Credit Is Possible: Here's How

    A bad credit report can become an obstacle, resulting in denials for credit or higher interest rates, but borrowers with low credit scores can still purchase a home.
  7. Personal Finance

    Trended Credit Data Could Increase Interest Rates for Borrowers (FNMA, EFX)

    Mortgage lenders will soon be required to use trended credit data to qualify borrowers. As a result, many borrowers could have to take higher interest rates.
  8. Personal Finance

    What Are Mortgage Lenders Allowed To Ask Borrowers?

    Seemingly intrusive or irrelevant questions are actually legal for lenders to ask of mortgage applicants.
  9. Personal Finance

    A Good Credit Score: Why Do You Need It?

    Your credit score can affect your ability to borrow money, buy a house or even get a job.
  10. Personal Finance

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
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 >>
  4. How do mortgage lenders verify employment?

    Discover how mortgage lenders confirm your current employment situation, even if self-employed, and learn what types of information ... Read Answer >>
  5. What is the 1003 mortgage application form?

    Learn about the 1003 mortgage application form, what information it requires and why this form is the industry standard for ... Read Answer >>
Hot Definitions
  1. Market Capitalization

    Market Capitalization is the total dollar market value of all of a company's outstanding shares.
  2. Capital Asset Pricing Model - CAPM

    Capital Asset Pricing Model (CAPM) is a model that describes the relationship between risk and expected return and that is ...
  3. Return On Equity - ROE

    The profitability returned in direct relation to shareholders' investments is called the return on equity.
  4. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  5. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  6. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
Trading Center