How is a borrowing base calculated?

Take eligible receivables and eligible stock, multiply each by its agreed advance rate, add the results and subtract any reserves. The lower of that figure and the facility limit is the amount that may be drawn. A business with US$3m of eligible debtors at 80% and US$1m of eligible stock at 50%, with a US$100,000 reserve, has a base of US$2.8m. Rates and definitions are set agreement by agreement; these are illustrative.

What happens if drawings exceed the borrowing base?

The excess is an over-advance, and the agreement normally requires it to be repaid, either at once or within a short agreed period. Failure to do so is usually a default. A lender may instead agree a temporary over-advance, sometimes pre-arranged for a seasonal stock build. Some agreements let the lender take control of the borrower's cash collections at that point, so what comes in repays the line.

How often is a borrowing base recalculated?

It depends on the agreement and on how fast the collateral turns. Monthly is common. Weekly or even daily reporting appears where stock or receivables move quickly or the borrower is under strain, and a lender can usually shorten the interval if availability runs low or a default occurs. Whatever the interval, the figure is only as current as the last certificate, which is why lenders test it between reports.

What assets can go into a borrowing base?

Receivables and stock are the usual core. Depending on the lender and the facility, plant, machinery and property can be included, usually at lower rates and sometimes as a fixed amount that reduces over time. Some assets stay out altogether, such as work in progress the lender could not sell. The base can only include assets over which the lender has effective security, so an earlier security interest or a supplier's retention of title claim can take an asset out.

// WORKED EXAMPLETHE ARITHMETIC A DECISION RESTS ON

Borrowing Base: a Worked Example

A limit that notices when the assets have gone.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A borrowing base is a facility limit that recalculates itself. Instead of a figure fixed at approval, the amount a borrower may draw is worked out each period from the receivables and stock it holds at that date, at agreed percentages, less whatever the lender has reserved. A lender adopts it when the danger is that the assets behind a working-capital line will shrink while the limit stays where it was. The borrower gets credit that can grow with sales; the lender gets a limit that falls when the collateral does. The price is the reporting that keeps the figure honest.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 02 — Aoraki Trade Exports. Paid in USD, costs in NZD, asking for a NZ$6m multi-currency facility. The MD won't say which currencies. Your call first, then the senior banker's.

Read the file →

PART OF Trade Loan

// 01 — WHY A LIMIT SHOULD MOVE WITH THE ASSETS

An overdraft or a fixed revolving line is sized at approval against a view of what the business will need, and it stays there until someone changes it. That works while the receivables and stock it funds stay roughly where they were. It leaves a blind spot if the ledger shrinks, the stock ages or a large customer stops paying, because the limit does not know. Drawings fully covered by good assets in one month can be covered by much less a few months later, with nothing in the facility having changed.

A borrowing base closes that gap by making the limit a calculation. The lender can follow working assets as they move without waiting for a review, and the source of repayment is plain: as debts are collected and stock is sold, cash comes in and the line reduces. The US national-bank supervisor's handbook describes the arrangement as advances limited to a percentage of eligible collateral, with strong controls and close monitoring as essential features.

// 02 — HOW THE FIGURE IS BUILT

Eligible receivables = receivables − ineligibles

Eligible stock = stock − ineligibles

Borrowing base = eligible receivables × advance rate

+ eligible stock × advance rate

− reserves

Availability = borrowing base or facility limit, whichever is lower

Headroom = availability − drawings

Each line rests on negotiated definitions. Eligible receivables decide which debts count at all. The advance rate decides how much of each dollar is funded, and dilution is one of the main reasons it sits below 100%. Reserves are held back for claims and costs that could reach the collateral before the lender does. The facility limit caps the result, so a larger base does not by itself produce a larger facility.

The borrower reports the figures on a borrowing base certificate, commonly monthly and more often when the business is under strain, and a field exam tests them. Drawings above the base are an over-advance, and the agreement says how quickly it has to be cleared, unless the lender has agreed a seasonal over-advance beforehand. Many asset-based agreements also let the lender take control of collections if the base falls too far, through cash dominion.

// 03 — THE EXAMPLE

An importer of camping and outdoor gear, constructed for this page like every figure in it, has a US$6.0m facility with a borrowing base: 80% of eligible receivables, 40% of eligible stock and a US$200,000 reserve. The rates are the example's and not a market norm. Two month-ends, in US$000:

November April

Eligible receivables 5,000 2,400

at 80% 4,000 1,920

Eligible stock 4,000 3,500

at 40% 1,600 1,400

Reserve − 200 − 200

Borrowing base 5,400 3,120

Facility limit 6,000 6,000

Availability (the lower) 5,400 3,120

Drawn 4,700 4,100

Headroom 700 (980)

In November the ledger is full of pre-season orders and the base has US$700,000 of room. By April the season has been soft. Receivables have been collected and not replaced, US$3.5m of stock is still in the warehouse, and drawings have fallen by only US$600,000, because much of the cash went to pay suppliers for the next range. The base now sits US$980,000 below the drawings.

April on a fixed limit: 6,000 − 4,100 = 1,900 undrawn

April on the borrowing base: 3,120 − 4,100 = (980) to clear or agree

On a fixed limit the same April looks comfortable. The base shows the opposite, and the importer has to reduce the line or agree an over-advance with the lender. It is an awkward conversation to have in April, and the facility is built to force it while there is still stock to sell.

// 04 — HOW IT DIFFERS FROM A COVENANT OR A FIXED LIMIT

A financial covenant looks back. It measures earnings or cover at a test date, and a breach brings the lender to the table. A borrowing base looks at what the business holds now and changes what can be drawn without anyone having to call anything. Lenders often run the two together: many asset-based agreements carry a single test that comes into force only when availability runs low, a springing covenant.

Three neighbours are often confused with it. The certificate is the document, and the base is the figure it reports. Asset-based lending is the wider product built around a base, sometimes with plant or property alongside. Invoice finance reaches a similar figure through the sale or assignment of the debts themselves.

DEFINED IN ONE PARAGRAPH → · THE CERTIFICATE, LINE BY LINE → · ASSET-BASED LENDING →

// 05 — WHERE IT DECIDES A FILE

The live question on a file is usually whether the structure belongs there, since the arithmetic can be made to work almost anywhere. A base has a cost on both sides. The borrower's finance team prepares it each period, and the lender pays for reporting, examinations and the time to read them. Lenders commonly use it where working assets swing through the year, as they do for the importer above.

Issue 04 puts that choice in front of the reader, with a borrowing base among the options on a manufacturer's working-capital request. When a structure earns its cost is a matter of judgment, which How Bankers Think takes up.

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Office of the Comptroller of the Currency, Comptroller's Handbook: Asset-Based Lending, Version 1.1 (January 2017), pages 1–3 — The US national-bank supervisor describes advances limited to a percentage of eligible collateral, drawings up to the lesser of the base and the commitment, and over-advances including seasonal ones; it applies to US banks and is cited for the mechanism — sections 01 and 02.

// QUESTIONS PEOPLE ASK

How is a borrowing base calculated?: Take eligible receivables and eligible stock, multiply each by its agreed advance rate, add the results and subtract any reserves. The lower of that figure and the facility limit is the amount that may be drawn. A business with US$3m of eligible debtors at 80% and US$1m of eligible stock at 50%, with a US$100,000 reserve, has a base of US$2.8m. Rates and definitions are set agreement by agreement; these are illustrative.
What happens if drawings exceed the borrowing base?: The excess is an over-advance, and the agreement normally requires it to be repaid, either at once or within a short agreed period. Failure to do so is usually a default. A lender may instead agree a temporary over-advance, sometimes pre-arranged for a seasonal stock build. Some agreements let the lender take control of the borrower's cash collections at that point, so what comes in repays the line.
How often is a borrowing base recalculated?: It depends on the agreement and on how fast the collateral turns. Monthly is common. Weekly or even daily reporting appears where stock or receivables move quickly or the borrower is under strain, and a lender can usually shorten the interval if availability runs low or a default occurs. Whatever the interval, the figure is only as current as the last certificate, which is why lenders test it between reports.
What assets can go into a borrowing base?: Receivables and stock are the usual core. Depending on the lender and the facility, plant, machinery and property can be included, usually at lower rates and sometimes as a fixed amount that reduces over time. Some assets stay out altogether, such as work in progress the lender could not sell. The base can only include assets over which the lender has effective security, so an earlier security interest or a supplier's retention of title claim can take an asset out.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Transaction bankerSells and structures the plumbing a business runs on — accounts, payments, collections, liquidity and trade finance.
Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Business relationship managerCarries a book of trading businesses — wins them, keeps them, and is the bank's voice when the answer is no.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

SIGNAL OR NOISE · THE ECONOMY · CURRENCY AND TRADE

An importer's policy is to hedge half of the next twelve months' purchases. Its currency has fallen 25% in three months, and the board proposes to stop hedging until the currency bounces back.

Signal or noise?

5 MORE ON THE ECONOMY · CURRENCY AND TRADE →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHBorrowing base What is a borrowing base, and when is it the wrong answer?