Borrowing Base

If you are applying for a loan or a line of credit from a bank, the larger your borrowing base, the more money you can get, more or less.

Think about it from the bank's perspective, i.e. put yourself in their black patent leather shoes for a moment. All they care about is that, if something goes wrong, they still get paid. Borrowing base is basically the value of the collateral you are putting up. Or in other words, what the lender will seize if you do not pay the loan back on time. Your Hello Kitty pencil sharpener, while it might hold a lot of personal value, probably won't have high value as collateral.

How the borrowing base is calculated is very...scientific. The lender will come up with a discount factor on your collateral, rather than using what you might feel is the full value.

For example, perhaps you are running a small business, and many customers owe you money, referred to as “accounts receivable.” The bank might discount those receivables by 20-40% if they are less than 90 days old, on the off-chance that a customer might never pay you. The lender might also decide to discount your finished goods inventory by 50% in order to come up with your borrowing base. They will most likely revaluate your collateral on a regular basis in case the value of your receivables, inventory, or equipment goes up or down. They will then adjust the amount of money you can borrow accordingly.