Borrowing base certificates: prove how much an asset-based lender will actually advance

Asset-based lenders do not normally lend against every pound shown in receivables or inventory. A borrowing base certificate calculates the value of eligible assets after agreed advance rates, exclusions, concentration limits and reserves, producing the amount the borrower can draw under the facility.

Start with the gross asset pool

The certificate can begin with total trade receivables, eligible inventory or another financed asset class. The figure should reconcile to the company's accounting records.

Using a different ledger total from management accounts creates immediate lender questions and weakens trust in the reporting process.

Remove assets that fail lender rules

Overdue debts, disputed invoices, related-party receivables, foreign debtors or slow-moving inventory can be excluded depending on the agreement.

Keep eligibility codes in the ERP where possible rather than adjusting a spreadsheet manually every month.

Apply the contractual advance rate

A lender might advance 85 percent of eligible receivables and 50 percent of eligible inventory, subject to caps.

The advance rate is not the same as total availability because reserves and concentration deductions can reduce the result further.

Large customers can reduce availability

If one debtor represents 40 percent of receivables but the lender caps concentration at 25 percent, part of those otherwise valid invoices can be excluded.

Sales growth with one major customer can therefore increase revenue while reducing the percentage of the ledger that supports borrowing.

Lenders can apply reserves for specific risks

Reserves can reflect customer credits, taxes, inventory costs, dilution, landlord claims or other risks defined by the facility.

Understand each reserve and how it can be released. A sudden new reserve can reduce available cash without any customer invoice changing.

Treat the certificate as a formal lender representation

Borrowing base certificates are often signed by a finance officer and delivered on a contractual schedule.

Review them independently before submission. Deliberately overstating eligible assets can create serious default and fraud consequences.

Worked example: gross receivables are £2 million. £200,000 is overdue and £300,000 exceeds a customer concentration limit, leaving £1.5 million eligible. At an 85 percent advance rate, gross availability is £1.275 million before reserves. A £100,000 lender reserve reduces final availability to £1.175 million.

Forecast borrowing base headroom weekly if payroll depends on the facility. Waiting until month-end can reveal too late that slow customer collections reduced availability below the next payment run.

Keep a variance bridge from last certificate to current certificate: new sales, collections, ageing exclusions, concentration, inventory change and reserves. That tells management why availability moved instead of presenting one unexplained lender number.

Use a locked certificate template approved with the lender. Manual formula edits can overstate availability even where source data is correct. Changes to advance rates, reserves or eligibility definitions should be version-controlled.

Worked example: inventory of £1.2 million is subject to a 50 percent advance rate, but £300,000 is obsolete and ineligible. Only £900,000 qualifies, generating £450,000 gross availability before reserves. Management that applies 50 percent to the full £1.2 million overstates borrowing by £150,000.

Reconcile customer credit notes and returns before certification. High dilution after the certificate date can cause the lender to apply reserves or lower future advance rates.

Keep supporting schedules available for lender field audits. The certificate is a summary; invoices, ageing, inventory records and proof of title support the number. A borrower that can produce evidence quickly can often resolve lender questions before they reduce availability.

Review certificate timing against the lender's cut-off for new draws. A borrower can calculate high availability on Monday but lose access by Friday if the certificate expired or a weekly reporting requirement was missed. Treasury should know how long each certificate remains valid.

Keep lender definitions visible to commercial teams. If overseas receivables or slow-moving inventory are ineligible, sales and procurement should understand that those assets consume working capital without increasing the borrowing base.

Set a maker-checker process for certificate submission. One employee can prepare the borrowing base, while another reviews ageing, concentration and reserves before the authorised officer signs. Because the certificate directly controls how much cash the company may draw, it deserves the same approval discipline as a bank payment.

Track availability after major customer receipts. A large debtor payment reduces receivables and can temporarily reduce borrowing base even though cash increases. Treasury should forecast both sides so it does not misread the repayment of receivables as a liquidity problem.

Keep certificate cut-off dates aligned with the source ledgers. A receivables ageing run at 30 September should not be combined with inventory from 5 October unless the lender permits mixed dates. Consistent cut-off protects the integrity of the calculation.

Use lender availability, not gross assets, when approving discretionary spending. The company can own plenty of receivables and inventory yet have little undrawn headroom after eligibility and reserves.