Borrowing Base Certificate and How to Fill One In

A client of mine ran a commercial flooring business with a $300,000 revolving line. In March she had $214,000 drawn and thought she had another $86,000 available. The bank's monthly borrowing base certificate came back and said her availability was $11,400. Nothing had gone wrong with the business. One general contractor owed her $94,000 and most of it had crept past 90 days, so the bank had simply stopped counting it.

That gap between your credit limit and what you can actually draw is what a borrowing base certificate measures, and it catches owners off guard every time. I prepare these for four clients each month. The form itself takes about twenty minutes once your aging report is clean. Understanding why the number shrinks takes longer, and it is the part that changes how you run collections.

What the certificate is doing

An asset based line of credit is secured by your receivables and sometimes your inventory. The bank is not lending against your business. It is lending against specific invoices it believes will get paid. Your limit, the $300,000 on the loan agreement, is a ceiling. Your borrowing base is the real number, recalculated every month, and you can draw against whichever is lower.

So the certificate is a one page declaration, signed by an owner or officer, that says: here is my total accounts receivable as of month end, here is the portion that does not qualify, here is the advance rate applied to the rest, and here is the resulting availability against what I have already drawn. Most banks want it by the 15th or the 20th of the following month, with the aging report and often a payables aging attached.

Miss the deadline and two things happen. The bank freezes new draws until it arrives, and the file picks up a documentation default that shows up at renewal. I have seen a late certificate cost a client a quarter point on their rate the following year, which on a $250,000 average balance was about $625.

How the number gets whittled down

Start with gross receivables, then subtract the categories the bank calls ineligible. These vary by lender, but the list below is close to standard and the thresholds are the ones I see most often.

Run my flooring client through that. Gross AR of $420,000, minus $94,000 over 90 days, minus a further $38,000 of concentration above the 20 percent cap, minus $6,800 of credit balances, leaves $281,200 eligible. At an 80 percent advance rate that is $224,960 of borrowing base, against $214,000 drawn. Hence $10,960 before you even adjust for a small reserve. The arithmetic is not complicated. What surprises people is how fast two line items remove $132,000 of collateral.

The advice I would push back on

When availability gets tight, the instinct is to ask the bank for a higher limit. Owners spend weeks assembling an increase request, and I understand why, since the limit is the number printed on the agreement and it feels like the constraint.

On an asset based line it usually is not. If your borrowing base is $225,000 against a $300,000 limit, the bank already gave you $75,000 of headroom you cannot reach. Raising the ceiling to $400,000 changes nothing on the day you need cash, and some banks charge an amendment fee of $1,500 to $2,500 to do it. I have watched a client pay that fee and draw exactly the same amount the following month.

The faster lever is the ineligible column. Collecting $40,000 of past due invoices does two things at once: it puts $40,000 in the bank and it moves those balances back into the eligible pool, adding roughly $32,000 of availability at an 80 percent rate. Nothing you can negotiate with a lender works that quickly. Our note on using an accounts receivable aging report weekly is the habit that keeps this from building up in the first place.

There are genuine reasons to raise a limit, mostly when your eligible base has grown and keeps bumping the ceiling for three or four months running. That is a different conversation, and you walk into it with the certificates as evidence.

Preparing one without errors

Close your month first. A certificate built from an unclosed ledger is a number you will have to restate, and restatements make underwriters nervous in a way that a small base does not. Then pull the AR aging as of the same date, aged by invoice date rather than due date, because almost every loan agreement defines the 90 day test that way and the difference on net 30 terms is a full month.

Three mistakes account for most of the corrections I have had to send a bank. Reporting progress billings or unbilled work in progress as receivables, when the agreement counts only invoiced amounts. Forgetting to net a customer deposit sitting in the AR ledger as a credit. And signing the certificate with the previous month's drawn balance, which happens when the line activity has not yet been reconciled to the bank statement.

Keep the workpaper. One spreadsheet tab per month showing how you got from gross AR to eligible AR, with the ineligible buckets subtotalled. When a field examiner shows up for the annual collateral audit, that file is the difference between a two hour visit and a two day one. Mine is a single workbook with twelve tabs and a summary, and the examiner for one client told me it cut their fieldwork in half.

If you are still deciding whether this structure fits you at all, read how a line of credit draw period actually works first, because a formula line and a non formula line behave very differently through a slow quarter.

When you are over advanced

Sometimes the certificate shows you have drawn more than your base supports. A $14,000 overadvance is not rare after a month when a big customer slipped. Report it accurately anyway. Banks discover these at audit, and the discovery of an understated ineligible balance is treated as a far more serious matter than the overadvance itself.

Most agreements require you to pay down the excess promptly, often within five business days. Some banks will grant a temporary overadvance in writing, usually for 30 to 60 days with a fee and a tighter reporting schedule, such as a weekly certificate instead of monthly. In my experience they say yes when the cause is identifiable and the fix is visible, and they say no when the base has been drifting down for three straight months.

Frequently asked questions

How often do I have to file a borrowing base certificate?

Monthly is standard on most asset based lines, due between the 10th and the 20th of the following month. Lenders move to weekly or even daily reporting when the facility is larger, when the base is volatile, or when the relationship is under watch. The frequency is in your loan agreement under reporting covenants.

What is a typical advance rate on receivables?

80 percent is the common figure for a bank line, sometimes 85 percent for a borrower with a long clean history and a diversified customer list. Inventory, when it counts at all, runs between 40 and 60 percent of cost rather than retail. Finished goods get a better rate than raw materials or work in progress.

Does the certificate affect my interest rate?

Not directly, since the rate is set in the agreement. It affects the rate indirectly through renewal. A year of certificates filed on time, with a stable base and no overadvances, is the cleanest argument you can bring to a pricing discussion. A year of late or restated ones works against you.

Can I prepare it myself or do I need an accountant?

You can prepare it yourself once someone has walked the definitions in your agreement with you and built the workpaper. The definitions matter more than the arithmetic, and they are specific to your document. Budget one session with your bookkeeper or accountant to set the template up, then it is a twenty minute monthly task.