A borrowing base certificate is a document that a company uses to draw funds from their asset-based loan (ABL). The certificate is typically used in ABLs secured by accounts receivable since these are structured as revolving lines.
This article explains how borrowing certificates works and covers the following:
- What is a borrowing certificate?
- Accounts receivable summary
- Inventory summary
- Borrowing base calculation
- Borrower certification
1. What is a borrowing certificate?
Borrowing base certificates are used whenever a company needs to draw funds from a revolving line of credit. They are commonly used in asset-based loans and bank lines of credit.
Revolving lines are typically secured by accounts receivable and/or inventory. The certificate tracks the changing values of accounts receivables, inventory (if used), and the line’s current balance. This information allows the borrowing company to determine the availability of funds for their next draw.
Borrowing base certificates are typically maintained by the client (borrower) and use a template provided by a lender. Here is a simplified example of a borrowing certificate looks:
| A/R Aging Summary | 3/15/2025 |
| Total Accounts Receivable | $2,000,000 |
| Less: Ineligible Accounts | |
| Accounts over 90 days | ($120,000) |
| Accounts exceeding concentration limit (20%) | ($60,000) |
| Total Eligible Receivables Amount | $1,820,000 |
| Advance Rate | 85% |
| Total Margined A/R Amount | $1,547,000 |
| Inventory Summary | 3/15/2025 |
| Total Inventory Amount | $700,000 |
| Less: Ineligible Inventory (Obsolete , WIP, etc.) | ($120,000) |
| Eligible Inventory | $580,000 |
| Advance Rate | 60% |
| Total Margined Inventory Amount | $348,000 |
| Borrowing Base Summary | |
| Available Borrowing Base | $1,895,000 |
| Less: Current Balance | ($1,000,000) |
| Available Funds | $895,000 |
Note: This table is based viewed on a desktop. The mobile version can be scrolled left/right by tapping on it.
The borrowing certificate is divided into three sections. The first section determines the margined accounts receivable. This is the maximum amount of A/R that can be potentially financed. However, it does not consider your current line balance. You arrive at this value by subtracting the ineligible accounts receivables from the total receivables and multiplying the result by your advance rate.
The second section covers the margined inventory (if used). The process is similar to the process for A/R. You arrive at this value by subtracting the ineligible inventory from the total inventory and multiplying it by the advance rate.
The final section determines the available borrowing base. The borrowing base is calculated by adding the margined A/R to the margined inventory and subtracting the current line balance.
Keep in mind that this is a simplified version. Loan balances are typically subject to minimums and credit limits. Additionally, the certificate also has some legal language regarding its accuracy.
The following sections explore each certificate component and how these values are calculated.
2. Accounts receivable summary
This section explains how to determine the A/R availability for financing. The information for this part of the certificate comes from your accounting system. Your accounting system must be current since the total value of A/R changes as invoices are created and collected.
Let’s examine each component of this section.
| Total Accounts Receivable | $2,000,000 |
| Less: Ineligible Accounts | |
| Accounts over 90 days | ($120,000) |
| Accounts exceeding concentration limit (20%) | ($60,000) |
| Total Eligible Receivables Amount | $1,820,000 |
| Advance Rate | 85% |
| Total Margined A/R Amount | $1,547,000 |
Note: This table is based viewed on a desktop. The mobile version can be scrolled left/right by tapping on it.
a) Total receivables
The total accounts receivable entry is self-explanatory. It contains the total value of A/R and comes from your accounting system.
b) Ineligible receivables
Lenders can only finance accounts receivable that meet their underwriting credit criteria. The next step is to identify the accounts receivable that are not eligible for funding. These includes A/R that:
- Is past 90 days
- Increases concentration risk
- Has low credit quality
Every lender has different requirements when determining which invoices are ineligible. This will depend on the transaction’s size, structure, and risk profile.
c) Margined Accounts Receivable amount
The last step is determining the amount of A/R that meets the financing criteria. We arrive at this figure by subtracting the ineligible accounts receivable from the total accounts receivable and then multiplying the result by the advance rate.
From the table above, we multiply $1,820,000 (eligible receivables) by 85% (advance rate) to get the total Margined A/R amount of $1,547,000.
3. Inventory summary
This section shows how to determine the availability of inventory for financing. It is only applicable if your company is financing inventory in addition to its A/R.
The information for this part of the certificate comes from your accounting system and your inventory management system. Companies that choose to finance their inventory must have a perpetual inventory system, which must be updated regularly.
Let’s examine each component in more detail.
| Inventory Summary | 3/15/2025 |
| Total Inventory Amount | $700,000 |
| Less: Ineligible Inventory (Obsolete , WIP, etc.) | ($120,000) |
| Eligible Inventory | $580,000 |
| Advance Rate | 60% |
| Total Margined Inventory Amount | $348,000 |
Note: This table is based viewed on a desktop. The mobile version can be scrolled left/right by tapping on it.
a) Total inventory amount
The total accounts receivable entry is self-explanatory. It contains the total inventory value and comes from your accounting and inventory management systems.
b) Ineligible Inventory
Lenders can only finance inventory that meets their underwriting credit criteria. The next step is to identify the inventory that is not eligible for funding. This category includes inventory that is:
- Obsolete
- Work in progress (WIP)
- Consigned
c) Margined inventory amount
The last step is determining the inventory amount that meets the financing criteria. We arrive at this figure by subtracting the ineligible inventory from the total inventory and multiplying the result by the advance rate.
From the table above, we multiply $580,000 (eligible inventory) by 60% (advance rate) to get the total Margined inventory amount of $348,000.
4. Borrowing base calculation
The final calculation determines the available borrowing base. This is the maximum amount of funds you can draw at this time. To calculate, add the margined accounts receivable amount to the margined inventory amount and subtract your current line balance.
Let’s examine the final section of the certificate.
| Borrowing Base Summary | |
| Available Borrowing Base | $1,895,000 |
| Less: Current Balance | ($1,000,000) |
| Available Funds | $895,000 |
Note: This table is based viewed on a desktop. The mobile version can be scrolled left/right by tapping on it.
For the table above, we add $1,547,000 (Margined A/R) and $348,000 (Margined Inventory), resulting in an available borrowing base of $1,895,000. Lastly, we subtract the current loan balance of $1,000,000 to arrive at the available funds of $895,000.
5. Borrower certification
Each borrowing base certificate is typically considered an extension of your asset-based loan legal documents. Consequently, it contains legal language to indicate that the borrower certifies the figures to be accurate. An authorized borrower’s representative must sign it, typically the CFO or a similar executive officer.
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Disclaimer: This article is provided for information purposes only. Consult a professional if you require legal or financial advice.