The borrowing base is a fundamantal tool for small businesses seeking funds to continue business.
Borrowing base is a fundamental instrument for a small business to ensure the amount of funds it can use for various capital expenditures. According to All Business, the borrowing base is the amount a lender is willing to lend against the dollar value of pledged collateral. In some banking systems borrowing base might be called "Margining."
Instructions
1. Calculate company inventory by adding the value of each item that the company sells. An inventory item is an item that was bought or produced to be sold.
2. Calculate the value of company equipment, which includes any item bought to be used by employees to run the business. Add up all the company equipment values.
3. List all accounts receivable information. Accounts receivable information is any amount of money the company should receive. An example would be payments on customer invoices.
4. Calculate company collateral. The company collateral is specified by the lender and can be inventory, equipment and\or accounts receivable.
5. Identify the lender discount factor. The lender discount factor is the percentage that is multiplied by the company collateral amount to determine the borrowing base. Depending on the lender's preference for collateral, the easier the collateral may be converted to cash the higher the discount factor will be.
6. Calculate the borrowing base by multiplying the company collateral with the discount factor. If the collateral amount is $50,000 and the discount rate is 50 percent---or 0.5---the borrowing base is $25,000.
