What is a borrowing base and how does it work?
Short Answer
A borrowing base is the amount you can borrow against pledged assets. It is eligible collateral multiplied by an advance rate, less ineligibles and reserves, giving your available facility.
Full Explanation
A borrowing base is the formula a lender uses to decide how much it will advance against the assets you have pledged as security. In its simplest form it is eligible collateral multiplied by an advance rate, minus collateral ineligibles and any asset-based lending reserve. The result is your availability — the maximum you can draw at any point. Because the underlying assets rise and fall, the borrowing base is recalculated regularly, usually monthly, through a borrowing base certificate that you submit to the lender.
Different asset classes attract different advance rates, reflecting how readily each can be realised on default. As an indicative guide, trade receivables commonly support 70–90%, inventory around 40–65% of cost (or up to 80–90% of net orderly liquidation value), and plant and equipment roughly 50–80% of orderly liquidation value. Intellectual property is usually a marginal top-up in mainstream asset-based lending, valued case by case rather than at a headline percentage. Ineligibles — overdue debtors, related-party balances, foreign receivables or stock the lender cannot easily sell — are stripped out first, and reserves are held back for dilution, disputes or priority claims.
In a UK facility the lender perfects its security by registering a charge at Companies House, and for intellectual property a note is made at the UK IPO. Many arrangements also operate cash dominion, so receipts sweep to the lender and reduce the balance. If your drawings exceed the calculated availability you are in overadvance, which the lender will expect you to clear quickly. Facilities are typically tested by a periodic field examination, and reserves or advance rates can be tightened if the collateral quality slips.
The practical takeaway is that your headline asset values are not what you can borrow — the advance rates, ineligibles and reserves determine that. Before approaching a lender, build a clean schedule of your receivables, stock, equipment and any registered IP, and model the borrowing base yourself so there are no surprises when the certificate is first prepared.
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