Borrowing base

A borrowing base is not simply a percentage of total receivables and inventory on the books. Lenders exclude categories they consider unreliable collateral before applying an advance rate to what remains, which means the calculated borrowing base is almost always smaller than a quick glance at the balance sheet would suggest.

What typically gets excluded

• Receivables that are significantly past due, or owed by a related party rather than an arm’s-length customer
• Receivables concentrated in one or a small number of customers beyond a level the lender considers safe
• Slow-moving, obsolete or work-in-progress inventory, as distinct from finished goods ready for sale
• Any receivable or inventory already pledged to another lender ahead of this one

Why clean records matter more here than elsewhere

A borrowing base calculation is only as reliable as the receivables ageing and inventory records behind it. A business with disorganized bookkeeping, inconsistent inventory counts, or accounts receivable ageing that has not been reconciled can end up with a smaller available borrowing base than its true collateral would otherwise support, simply because the lender cannot verify what it cannot see clearly.

What buyers and sellers commonly miss

A borrowing base certificate the seller has been submitting to their existing lender is a useful diligence document precisely because it shows how a lender, not the seller, has been valuing the collateral over time — including any period where the calculated base ran close to, or below, what was actually drawn, which is an early sign of a business under working-capital strain.