A borrowing base represents the maximum sum of money a lender is prepared to loan a business based on the value of the collateral the organization pledges. To determine this amount, lenders often use a method called “margining” calculating the product of collateral’s value and a discount factor. If the value of the collateral declines, so does the credit limit. A borrowing base certificate is an official document showing the calculation the lender utilized to establish how much money it can lend. Available funds, inventory, and accounts receivable are among the things listed on this certificate.
Types Of Asset-Based Loans
There are five commonly used types of asset-based loans utilized to determine a borrowing base:
This type of financing involves using the value of current or future inventory as a borrowing base for a loan. This is a complex financing method because a business’s inventory levels can fluctuate drastically.
This financing method involves a business purchasing invoices and advancing part of the sum listed on the invoice to the borrower. This entails that the borrower’s customers pay the company that buys the invoices.
This type of financing (A/R = accounts receivable) involves using existing customer invoices to establish the borrowing base for a loan. The borrower chooses the invoices they wish to finance and the lender can issue the loan at a discounted rate. The borrower can then repay the lender as they receive business from customers.
The equipment used for this financing method can be either owned or in the process of being purchased by the borrower and is used as collateral for the loan. Should the borrower default on the loan, the lender can repossess the equipment (like a personal auto loan). Given that most business equipment depreciates over time, it’s critical to update borrowing base certificates frequently when using this method.
Real Estate Financing
Equity in owned property may be utilized as the borrowing base when applying for a loan. A borrower can secure a real estate equity loan at most major banks.
In addition to a borrowing base certificate, some lenders also request collateral reports, which display the updated status of all the assets a business owns. In essence, a borrowing base helps minimize the risk of default on a loan and thus protects both the lender and borrower. The borrowing base certificate is the official document that lists the maximum amount of money loaned.
Speak To The Borrowing Base Certificate Experts
Speak to the professionals at FVCbank to learn more about borrowing base certificates. Since 2007, we have been dedicated to providing customers with high-quality banking products that can improve their financial well-being. FVCbank offers asset-based loans that can be financed through inventory, equipment, or account receivables. Our experienced loan officers can help you determine how much you can borrow based on the value of your collateral and prepare a borrowing base certificate. Call FVCbank today at (703) 436-4740 or contact us online for more information about our products.