Borrowing base

Definition

A borrowing base is the maximum a borrower may draw on a revolving (operating) line at a point in time, computed from the collateral pledged to the lender. Each collateral line (cattle by class, receivables, the milk check, feed and crop inventory, and so on) contributes its eligible value times an advance rate, the share of that value the lender will lend against. Some items are subtracted rather than added (deductions), such as book overdrafts or, under some agreements, trade payables.

Availability (also called excess, or a deficit or overadvance when negative) is the borrowing base minus what is already owed on the line. A positive availability is room to draw. A negative one usually has to be cured within a set period by paying down the line or adding collateral.

The borrowing base is recomputed on a fixed cadence, usually monthly, and reported to the lender on a borrowing base certificate. It is distinct from the commitment, the line’s stated maximum: the amount that can actually be drawn is limited by whichever is lower.

Where accounts payable go

Lenders treat trade payables in one of two ways, and the loan agreement says which:

Inside the base: A/P (or A/P past a set age) is a deduction line, so it lowers the borrowing base itself.
In availability: the base is computed from assets only, and A/P is subtracted alongside the loan balance when computing availability.

When A/P is deducted in full, availability comes out the same either way, but the reported borrowing base, and any ratio built on it, differs. Always say which convention is in use.

Formula

Plain text:

eligible (line)   = gross (line) − ineligibles (line), then any cap applied
line value        = eligible (line) × advance rate (line)
borrowing base    = Σ asset line values − Σ deduction line values
availability      = borrowing base − (loan balance + accrued interest)
                    [− trade payables, if A/P is treated outside the base]
drawable          = min(commitment, borrowing base [− A/P]) − (loan balance + accrued interest)

LaTeX:

\mathrm{BB} = \sum_{i \in \text{assets}} E_i \, r_i \; - \sum_{j \in \text{deductions}} E_j \, r_j

\mathrm{Availability} = \mathrm{BB} - \left(L + I_{\text{accrued}}\right) \;[-\; AP]

E is eligible value and r the advance rate for each line; L is the loan balance.

Hedged and unhedged inventory of the same class are separate lines with separate advance rates. They are never blended into one average rate (see hedge coverage).

How to pull it in DC305

DC305 supplies only the cattle lines: head counts by class at period end, and the events behind the roll-forward. Pull class counts as described on dairy cattle inventory classes and reconcile them with the herd inventory roll-forward.

Everything else comes from other systems:

Receivables and payables: the accounting system’s aged detail as of period end (see A/R and A/P aging).
Milk check: the cooperative or processor statement (see milk check).
Feed and crop inventory: physical counts, scale tickets and the accounting system.
Loan balance and accrued interest: the lender’s loan statement as of the same date.

Typical range

Herd context: US dairy operating lines secured by cattle, receivables and inventory; terms vary by lender and by loan agreement.

There is no typical borrowing base in dollars; it scales with the operation. What compares across operations is the structure:

Reporting cadence: monthly is most common, with the certificate due roughly 15–30 days after month end. Larger or stressed credits may report more often.
Deficit cure period: commonly a few business days to about 30 days after the certificate is delivered.
Advance rates: set per collateral line; see eligible collateral for industry ranges.

Common mistakes

Applying the advance rate to gross instead of eligible. Ineligibles come off first, then caps, then the rate.
Blending hedged and unhedged inventory into one line at an average rate.
Mixing dates. Cattle counts, aging, loan balance and accrued interest must all be as of the same period-end date, not the date a report was run.
Leaving accrued interest out of the loan position, or counting it twice (once in the loan position and again as the lender’s interest bill in A/P).
Not stating where A/P sits. A base with A/P deducted inside it isn’t comparable with one that subtracts A/P in availability.
Ignoring the commitment. A large borrowing base doesn’t raise the line above its stated maximum.
Counting intercompany balances as eligible receivables (see intercompany eliminations).