One of the many challenges entrepreneurs face is keeping their capital levels sufficient enough to fund their growth. Other than cash on hand, many businesses rely on having a business line of credit (LOC); young, rapidly growing businesses, including manufacturers and distributors that have a lot of seasonality in their sales, may benefit from having an LOC tied to a borrowing base.

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. Lines of credit that rely on a borrowing base are typically made on a percentage of accounts receivable and inventory. They’re repaid by customer collections, and new advances are made against receivables and inventory as these are created. Because loans are tied to fluctuating collateral, the amount available for borrowing will increase under increasing sales.

How Is the Base Calculated?

There are a number of different ways banks can determine the base. Most often, lenders identify a discount factor that’s multiplied by the value of the collateral pledged to arrive at the borrowing base.

For the bank to be able to calculate the borrowing base, customers are asked to complete a Borrowing Base Certificate (BBC), a simple form that identifies all the assets that will be used as collateral (these take only minutes to complete). The BBC would include summaries of inventory and receivables, as well as any other information required by the lender, and is usually updated periodically throughout the term of the loan.

What To Expect from Your Bank

Collateral, discount rates, certificates and other factors related to borrowing bases are different from bank to bank, so it’s wise to understand what yours expects. Be prepared to discuss:

  • How the bank’s discount factor is determined, and how the borrower can influence that analysis
  • BBC requirements (some banks require that you provide a quarterly or bi-annual certificate, while others may require updating each month)
  • Any monitoring requirements

And, because a borrowing base can’t be determined without the proper financial information, calculate these prior to your discussions:

  • The value of your inventory – the current market value of your products, not what it cost you to make them
  • Accounts receivable – how much money you’re owed on invoiced sales will be considered collateral by most bank

With this information in hand you can feel prepared to discuss assets potentially available for use as collateral. Your banker will help determine the actual value, then apply the discount factor appropriate for your situation.

When securing a line of credit for short term financing, it’s important for service providers and small manufacturers to work with a trusted banker who can provide valuable insights and sound advice regarding the borrowing options available to their businesses, including a borrowing base. Knowing what those options are and how they align with your long-term needs is something a local bank like Investors Community Bank excels at. Our bankers are business experts who can provide the guidance you need to make the most practical decisions to help you reach both short- and long-term goals.

Read more about the types of loans available and the process of getting approved by downloading our helpful Guide to Getting a Business Loan eBook.

Written by Tom Pennings

Tom Pennings is a Fox Valley native dedicated to customer-centric business banking. His well-rounded experience includes commercial deposits and lending, which contributes to his thorough understanding of the financial issues small business owners face. He enjoys frequent in-person visits with his customers and utilizing his network to connect people who can help each other's businesses grow.

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