Borrowing base certificates: Overview, definition, and example
What is a borrowing base certificate?
A borrowing base certificate is a document provided by a borrower to a lender that outlines the value of collateral available to secure a loan, typically in asset-based lending. The certificate details the borrower’s assets, such as accounts receivable, inventory, and other qualifying assets, that can be used as collateral to support the loan. The purpose of the borrowing base certificate is to determine the amount of credit a borrower is eligible to receive, based on the value of their assets. It is typically required by lenders in revolving credit lines or short-term loans and is updated periodically to reflect changes in the value of the borrower’s assets.
Why are borrowing base certificates important?
Borrowing base certificates are important because they help ensure that a borrower has sufficient assets to secure a loan and that the lender’s risk is appropriately managed. For lenders, the borrowing base certificate provides transparency into the value of collateral available to cover the loan. For borrowers, it establishes the maximum amount of credit they can access, based on the value of their assets. These certificates help maintain a balance between lending and risk management, ensuring that borrowers do not take on excessive debt relative to the assets they have available. Regular updates of borrowing base certificates allow the lender to adjust credit limits based on fluctuations in asset values.
Understanding borrowing base certificates through an example
Let’s say a company, ABC Manufacturing, has a revolving credit line with a bank. The credit line is secured by the company’s accounts receivable and inventory. On a quarterly basis, ABC Manufacturing submits a borrowing base certificate to the bank that details the value of its accounts receivable and inventory. If ABC Manufacturing’s accounts receivable amount to $1 million and its inventory is valued at $500,000, the total borrowing base certificate might allow the company to borrow a percentage of these amounts, say 85%, which would provide ABC with $1.275 million in available credit.
In another example, a construction company, BuildIt Co., has a line of credit secured by its equipment and ongoing projects. Each month, BuildIt Co. submits a borrowing base certificate to its lender, detailing the current value of the equipment and the progress of its projects. If the equipment is valued at $2 million and the company’s projects have a combined value of $500,000, BuildIt Co.’s borrowing capacity is based on these assets, which can fluctuate as projects are completed or additional equipment is acquired.
An example of borrowing base certificate clause
Here’s how a borrowing base certificate clause might look in a loan agreement:
“The Borrower shall deliver to the Lender, no later than the 15th day of each month, a Borrowing Base Certificate certifying the value of eligible accounts receivable, inventory, and other collateral, as determined in accordance with the terms of this Agreement. The Borrowing Base Certificate shall serve as the basis for determining the Borrowing Base, and the Borrower’s borrowing capacity shall be limited to the Borrowing Base as outlined in such certificate, subject to the Lender’s approval.”
Conclusion
Borrowing base certificates play a critical role in asset-based lending by providing transparency into the value of collateral available to secure a loan. They help both the lender and the borrower manage credit risk and ensure that borrowing levels align with the value of the borrower’s assets. Regular updates of the borrowing base certificate allow lenders to monitor asset values and adjust credit limits accordingly, while also giving borrowers a clear understanding of their available credit. By using borrowing base certificates, businesses and lenders can engage in more secure and manageable lending arrangements.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.