Borrowing Base
Candlefocus EditorBorrowing Base is an important tool used by lenders to monitor a client's revolving line of credit. This particular metric gives lenders a better understanding of the company's financial standing and assesses the value of the kind of assets that are being used as collateral for the loan. For example, if a company has a large inventory and pledge it as security, lenders will look at the quality and quantity of such inventory as part of their analysis.
A borrower's Borrowing Base is calculated and determined by their lenders. When lenders set a Borrowing Base, they look at particular components such as inventory turnover, accounts receivable collections, accounts payable advantage, and current asset conversion cycle. It serves as a mathematical formula that lenders use to calculate the eligible collateral that is suitable for loan repayment.
For lenders, understanding a company's Borrowing Base helps them gauge the financial health of their client, which helps them decide whether or not to grant a loan. The Borrowing Base is one of the most important elements of loan underwriting used by lenders to decide whether to grant a loan.
In addition, lenders will use the Borrowing Base as an early warning system for issues that could potentially risk loan repayment. For example, if there is a significant drop in one or more of the core components that make up the Borrowing Base, a lender may adjust the amount of money they are willing to loan the borrower, or they may decide not to lend money at all.
In conclusion, the Borrowing Base is a metric used by lenders to decide the amount of short-term financing they are willing to provide to a borrower. By assessing the quality and value of the borrower's assets, lenders can better determine their level of risk associated with the loan, and make informed decisions about whether or not to lend money.