If you have an asset-based line of credit, the borrowing base is the number that decides how much of it you can actually draw. Not the facility size on the front page of your loan agreement. This one. Most owners discover the difference the first month they need the money.
What is a borrowing base?
A borrowing base is the amount a lender will lend against your collateral at a given moment. It is calculated by applying advance rates to eligible receivables and inventory, then subtracting reserves. It moves every month with your collateral, which is why an asset-based line is a formula, not a fixed commitment.
The number on your term sheet is a ceiling. The borrowing base is the floor-to-ceiling reality, recalculated continuously. If your facility says $2,000,000 and your borrowing base says $1,400,000, you can draw $1,400,000.
What is a borrowing base certificate?
A borrowing base certificate (BBC) is the report you submit to your lender showing that calculation. It lists gross collateral, subtracts ineligible amounts, applies the agreed advance rates, deducts reserves, and arrives at your current availability. It is typically signed by an officer of the company, certifying the figures are accurate.
Submission frequency varies with facility size and risk: monthly is standard for smaller facilities, weekly is common as balances grow, and daily reporting appears on larger or more closely monitored lines. The frequency is negotiated and written into the credit agreement. It is worth knowing which one you are agreeing to, because it is a real operating burden.
How is a borrowing base calculated?
The structure is the same almost everywhere:
(Eligible AR × AR advance rate) + (Eligible inventory × inventory advance rate) − reserves = availability
Then subtract whatever is already outstanding on the line to get what you can draw today.
The two words that do all the work are eligible and reserves. Your gross balances are the starting point, not the answer.
What are typical advance rates?
These are market conventions, not rules, and every credit agreement sets its own:
| Collateral | Typical advance rate | Notes |
|---|---|---|
| Eligible accounts receivable | 75–85% | The core of most facilities |
| Eligible inventory, finished goods | 40–60% | Often capped as a % of total availability |
| Eligible inventory, raw materials | 25–50% | Lower; harder to liquidate |
| Work in process | Usually 0% | Rarely fundable |
| Equipment (if included) | Off appraised liquidation value | Frequently a separate term loan instead |
Inventory almost always carries a sub-limit, a hard dollar cap or a percentage-of-total-availability ceiling, so a large inventory balance does not translate into proportional borrowing power.
What makes a receivable ineligible?
Ineligibility is where most of the gap between “our AR” and “our availability” comes from. Common exclusions:
- Aged invoices, anything past 90 days from invoice date, and often the entire balance owed by a customer if a set portion of their account is past due (the “cross-aging” rule).
- Concentration above the cap, the portion of any single customer’s balance exceeding a limit, commonly 15–25% of the eligible pool. This one surprises people; it is covered in more depth in why your best client scares lenders.
- Affiliate and intercompany invoices, not arm’s length.
- Foreign obligors, unless credit-insured or backed by a letter of credit.
- Contra accounts, where the customer is also your vendor and could offset what they owe.
- Disputed, consigned, bill-and-hold, or COD invoices.
- Retainage, a large factor in construction, where a slice of every billing is held back until completion. See progress billings and retainage.
What are reserves?
Reserves are dollar amounts deducted from availability to cover risks the advance rate does not already price. They are set by the lender and can be adjusted during the facility.
- Dilution reserve, for credit memos, returns, discounts, and write-offs. If your historical dilution runs 6%, expect the reserve to reflect it.
- Rent / landlord reserve, typically a few months’ rent at locations where you hold inventory and the landlord has not signed a waiver.
- Payroll and sales tax reserves, for obligations that would rank ahead of the lender.
- Availability blocks, a flat holdback, sometimes used in place of a financial covenant.
Reserves are the most negotiable and least understood line in the calculation. Landlord waivers, for example, often remove the rent reserve entirely. That is real liquidity available for the cost of some paperwork.
A worked example
A distributor with a $2,500,000 facility, 85% on AR and 50% on eligible inventory:
| Line | Amount |
|---|---|
| Gross accounts receivable | $2,400,000 |
| Less: invoices over 90 days | ($180,000) |
| Less: affiliate invoices | ($40,000) |
| Less: foreign obligors | ($95,000) |
| Less: concentration above 25% cap | ($210,000) |
| Eligible AR | $1,875,000 |
| AR availability @ 85% | $1,593,750 |
| Gross inventory | $900,000 |
| Less: work in process | ($150,000) |
| Less: obsolete / slow-moving | ($110,000) |
| Eligible inventory | $640,000 |
| Inventory availability @ 50% | $320,000 |
| Gross availability | $1,913,750 |
| Less: dilution reserve | ($75,000) |
| Less: landlord reserve | ($40,000) |
| Less: payroll tax reserve | ($30,000) |
| Net availability | $1,768,750 |
| Less: current line balance | ($1,200,000) |
| Available to draw today | $568,750 |
The business is carrying $3,300,000 of receivables and inventory. It can borrow $1,768,750 against it, about 54 cents on the dollar. Nothing went wrong here; this is an ordinary, healthy calculation. But an owner who budgeted against the $2,500,000 facility size, or against the $3,300,000 of collateral, is short.
Why is my availability lower than I expected?
Because three separate reductions stack, and each is invisible on your balance sheet. Ineligibility removes collateral from the pool, the advance rate lends only a fraction of what remains, and reserves come off the result. Your financial statements show none of these, so the gap only appears on the certificate.
The single most useful thing you can do before signing an asset-based facility is ask the lender to run a sample borrowing base certificate on your actual collateral, not a template. Two facilities with identical headline sizes and identical advance rates can produce very different availability once eligibility rules and reserves are applied, a point worth checking against every other clause in the term sheet.
How to make your borrowing base bigger without borrowing more
- Collect faster. Every invoice that crosses 90 days leaves the pool entirely.
- Fix cross-aging exposure. One chronically slow customer can disqualify their whole balance.
- Get landlord waivers signed at inventory locations to remove rent reserves.
- Reduce dilution. Fewer credit memos and disputes directly lowers the dilution reserve over time.
- Clean up the inventory file. Obsolete stock sitting on the books earns nothing and can drag the appraisal.
- Address concentration before the cap does it for you.
- Reconcile your BBC to your general ledger monthly. Certificates that don’t tie out invite field-exam scrutiny and new reserves.
None of this requires a new lender. It is the same collateral, presented and managed the way the formula actually reads it.
Run your own file first
Want to see what your real availability would look like, net of eligibility, advance rates, and reserves? Run the assessment or send us your AR aging and inventory report and we’ll show you where the borrowing base actually lands.
Educational only. Nothing here is an offer of credit, a commitment to lend, or advice on any specific transaction. Advance rates and reserve conventions vary by lender, collateral, and industry.