A borrowing base is a collection of assets that are used to secure a loan. Lenders base the amount of money they are willing to offer on the borrowing base, making this amount very important for both lenders and borrowers. When a lender decides to offer credit or a loan, it makes a borrowing base calculation using a formula contractually agreed to by lender and borrower to determine how much money should be offered. This formula also allows for adjustments to revolving lines of credit in the event that there is a change in circumstances for the borrower.
The borrowing base includes any assets that the borrower has, including assets that are pledged as collateral on the loan. It is determined by reviewing the application filed by the borrower. Borrowers are expected to list assets, liabilities, and income. They must also provide information such as disclosures that assets are already pledged as collateral on other loans, the source of their income, and so forth. All of this information is used with the borrower's credit history to determine the credit risk posed by lending to the applicant.
To calculate the amount it wants to lend, the lender multiplies the borrowing base by a discount. The discount is determined by the credit risk. High risk loans will have a higher discount, reflecting the lender's concerns about getting repaid in full. Lower risk loans have a lower discount, because the lender is more confident that the loan will be paid off.
In a simple example, if someone has a borrowing base of $100,000 United States dollars (USD) and is considered low risk, the lender might decide that the discount should be 85%, and offer $85,000 USD in loans to the borrower. A higher risk borrower might be offered a loan of $60,000 on the base of the borrowing base and credit history. This process is known as margining, and every lender has slightly different ways of determining the percentage of the discount.
People who want to apply for loans can estimate their borrowing base and obtain their credit score to learn more about what kinds of loans might be available to them. Working with a broker can be helpful, as brokers may be able to negotiate better deals than people can get on their own. Brokers also have a great deal of experience and can provide people with tips to reduce their credit risk to bolster a loan application.
