Borrowing Base

Published Feb 14, 2023

Definition of Borrowing Base

A borrowing base is a formula used by banks to determine the maximum amount of money a business can borrow. It is calculated by taking into account the value of the company’s assets, such as accounts receivable, inventory, and other liquid assets. That means the borrowing base is a measure of the company’s ability to repay its debt.

Example

To illustrate this, let’s look at a small manufacturing company. The company has USD 1 million in accounts receivable, USD 500,000 in inventory, and USD 200,000 in other liquid assets. The bank then uses a borrowing base formula, including a discount factor, to determine the maximum amount the company can borrow. Let’s assume the formula is as follows:

Accounts Receivable + Inventory + Other Liquid Assets x 0.75 = Borrowing Base

In this case, the company’s borrowing base would be USD 1.45 million (USD 1 million + USD 500,000 + USD 200,000 x 0.75). That means the company can borrow up to USD 1.45 million from the bank.

Why Borrowing Base Matters

The borrowing base is an important tool for banks to assess the creditworthiness of a business. It helps them to determine the maximum amount of money they can lend to a company without taking on too much risk. That means it is an important factor for banks when deciding whether or not to grant a loan. Furthermore, it also helps businesses to plan their financing needs and manage their cash flow more effectively.