You have $2 million in open invoices and a warehouse full of stock, yet the lender says you can draw only $1.6 million. Nothing is broken. That number is your borrowing base: the formula that decides how much of your collateral the lender will actually lend against.
If you have an asset-based line of credit, a bank revolver tied to receivables, or an SBA working capital line, the borrowing base is your real credit limit. It moves every time you report, because customers pay, invoices age and inventory sells. Owners who understand the formula can plan around it. Owners who don't tend to find out about it on the day they need cash.
This guide draws on the Office of the Comptroller of the Currency's examiner handbooks, which describe how banks are expected to run these lines, and on SBA's own program pages.
What is a borrowing base?
A borrowing base is the maximum a lender will advance on a revolving line, calculated from the value of your eligible collateral after advance rates and reserves. It usually combines eligible accounts receivable and eligible inventory.
The OCC's Comptroller's Handbook on Asset-Based Lending (Version 1.1) describes it as a collateral base, agreed between borrower and lender, that limits how much the lender will advance. The formula, in the handbook's words, "specifies the maximum amount that can be borrowed in terms of collateral type, eligibility, and advance rates."
Two numbers matter. Your commitment is the ceiling written into the loan agreement, say $2 million. Your borrowing base is what your collateral supports today. The handbook describes revolver draws as limited to "the lesser of the available borrowing base or the revolver commitment amount," so you can draw only whichever is lower.
That makes a borrowing base line different from an unsecured line with a fixed limit. A growing distributor with rising receivables gets more room automatically. A company whose customers start paying late loses room, sometimes within one reporting period.
How is a borrowing base calculated?
Borrowing base = (eligible receivables × receivables advance rate) + (eligible inventory × inventory advance rate) minus reserves. Every term in that formula is negotiated, and each one can move the result by six figures.
A second formula tells you what you can draw today:
Excess availability = the lower of the borrowing base or the commitment, minus the loan balance.
Typical advance rates
An advance rate is the share of an eligible asset's value the lender will lend against. The rest is the lender's cushion if it ever has to collect or liquidate.
| Collateral | Typical advance rate at banks | Source |
|---|---|---|
| Eligible accounts receivable | 70% to 85% | OCC Asset-Based Lending handbook, p. 17 |
| Eligible inventory | Up to 65% of book value, or 80% of net orderly liquidation value (NOLV) | OCC Asset-Based Lending handbook, p. 19 |
The handbook puts it plainly: "Common advance rates range from 70 percent to 85 percent of eligible accounts receivable," and "a bank typically advances up to 65 percent of the book value of eligible inventory, or 80 percent of the NOLV." NOLV is what an appraiser estimates the inventory would fetch in an orderly sale. It is usually well below what you paid, which is why inventory gets a smaller advance than receivables.
A worked example
Cedar Valley Components is a fictional parts distributor with 30-day terms and a $2,000,000 revolver. Every figure below is our own illustration, built with rates inside the OCC's ranges.
Step 1: Start with gross receivables and remove ineligibles.
| Receivables | Amount |
|---|---|
| Gross accounts receivable | $2,000,000 |
| Less invoices past due by three times terms (90 days on 30-day terms) | ($150,000) |
| Less cross-aged accounts | ($60,000) |
| Less concentration excess (one customer above a 20% cap) | ($200,000) |
| Less contra account (a customer that is also a supplier) | ($40,000) |
| Less affiliate receivables | ($30,000) |
| Less unbilled and progress invoices | ($20,000) |
| Eligible accounts receivable | $1,500,000 |
| × 85% advance rate | $1,275,000 |
A quarter of the receivables, $500,000, never entered the formula. Owners tend to fixate on the advance rate, but in this example the ineligibles cost more availability than the gap between an 80% and an 85% advance rate would ($75,000).
Step 2: Value the inventory. Cedar Valley carries $1,200,000 of inventory at cost. The lender excludes $200,000 of work-in-process, $100,000 of stock with no sales in 12 months, $50,000 at a third-party warehouse with no access agreement and $50,000 on consignment. That leaves $800,000 eligible.
Assume the appraiser puts NOLV at 70% of cost, or $560,000. At 80% of NOLV the inventory advance is $448,000. The book-value test, 65% of $800,000, would give $520,000. If the agreement uses the lower of the two, the inventory line is $448,000.
Step 3: Subtract reserves. Cedar Valley leases its warehouse, so the lender holds a $45,000 rent reserve (three months of rent a landlord could claim ahead of the bank) and a $15,000 reserve for accrued payroll taxes. Total: $60,000.
Step 4: Put it together.
- Receivables: $1,275,000
- Inventory: $448,000
- Less reserves: ($60,000)
- Borrowing base: $1,663,000
The commitment is $2,000,000, but Cedar Valley can reach only $1,663,000. With $1,300,000 already drawn, excess availability is $363,000. That is the cash cushion the owner should plan around, not the $2 million on the term sheet.
Pro tip: Before you sign, ask each lender for its eligibility definitions in writing and run your last 12 months of aging reports through them. Two offers with the same headline advance rate can produce very different average availability once each lender's ineligibles are applied.
What counts as eligible collateral?
Eligible collateral is any receivable or inventory item that passes every test in your loan agreement: age, customer quality, location and lien priority. Anything that fails counts as zero. Lenders exclude what is slow to collect, easy to dispute or hard to sell.
Receivables lenders commonly exclude
| Ineligible type | What it means | Why lenders exclude it |
|---|---|---|
| Aged receivables | Invoices past due by three times the terms | The OCC handbook says an account "is considered ineligible collateral when it is past due by three times the terms" (p. 17) |
| Cross-aged accounts | All of a customer's invoices, once any or some share of them are delinquent | A customer late on most invoices is likely to be late on the rest |
| Concentrations | The part of one customer's balance above a cap | The OCC suggests limiting concentrated accounts "to no more than 10 percent to 20 percent of the receivables borrowing base" (p. 16) |
| Contra accounts | Customers you also buy from | The customer can "set off" what it owes you against what you owe it (OCC, p. 18) |
| Affiliate receivables | Amounts owed by related companies | Related companies can fail together and are harder to verify |
| Federal government receivables | Invoices to U.S. agencies | Assigning them to a lender requires written notice to the agency under the Assignment of Claims Act, so many lenders exclude them until that paperwork is done |
| Unbilled and progress billings | Work not yet invoiced, or invoiced before completion | There is no completed claim for payment yet |
Cross-aging catches owners off guard. The OCC describes it as a rule under which "all of a party's accounts are designated ineligible collateral when any (or some percentage)" of them are past due (p. 17). The percentage is set in your agreement, so ask what it is. One slow customer can take its whole balance out of the formula.
Inventory lenders commonly exclude
- Work-in-process. The OCC notes that "work-in-process has limited liquidation value" (p. 19), and it is often left out entirely.
- Slow-moving or obsolete stock. Items past an age cutoff or with no recent sales.
- Inventory off-site or in transit, unless the lender has an access or control agreement with the warehouse.
- Consigned goods, which you do not own.
- Perishable or highly specialized goods, which are hard to resell.
Reserves: the quiet line item
A reserve is a dollar amount the lender subtracts to cover a risk the formula does not capture: rent owed to a landlord, unpaid payroll or sales taxes, or above-normal dilution. Many agreements let the lender add reserves at its discretion. Negotiate that language, because a reserve added without notice can erase availability you were counting on.
What is a borrowing base certificate?
A borrowing base certificate (BBC) is a signed report showing your current eligible collateral and the resulting borrowing base. It is the document that supports each draw, and an officer of the company certifies that it is accurate.
A typical certificate includes:
- Gross receivables from the accounts receivable aging
- Each category of ineligible receivables, itemized
- Eligible receivables and the advance rate applied
- Inventory by type (raw materials, work-in-process, finished goods) and inventory ineligibles
- Reserves
- The total borrowing base, the loan balance and excess availability
- Supporting schedules: the receivables aging, payables aging and an inventory listing
How often you file one
It depends on the lender and your risk. The OCC says an asset-based lender "often requires borrowing base certificates and supporting documentation on a weekly or monthly basis" (p. 23). For retailers, "most banks require daily or weekly borrowing base certificates" (p. 14). Your agreement sets the schedule, and a late or missing certificate can itself be a default.
Pro tip: Close your books on the same day every month and pull the aging report from your accounting system that day. Consistent certificates are the cheapest way to earn a lender's trust.
How lenders use the borrowing base to monitor you
The borrowing base doubles as an early-warning system. Each certificate shows how fast customers pay, how inventory moves and how much cushion is left. Lenders pair it with field exams, appraisals and control over your collections.
Field exams and appraisals
A field exam is an on-site audit of your collateral. Examiners match invoices to shipping records, confirm balances with customers, review credit memos and check inventory. The OCC handbook notes that the cost "is generally passed on to the borrower" (p. 23). Inventory appraisals are refreshed periodically, and the handbook says appraisals should give NOLV as the standard for valuation, not cost or retail value (p. 23).
Dilution
Dilution is the gap between what you invoice and what you collect, caused by credits such as returns, discounts, allowances and disputes. The OCC says dilution "varies by industry but is usually expected to be 5 percent or less of receivables" (p. 17). If yours runs higher, expect a lower advance rate or a dilution reserve.
Lockboxes and cash dominion
In many asset-based lines, customers pay into a lockbox the lender controls. Under full cash dominion, collections go straight to paying down the loan and you redraw as needed. Many facilities use springing dominion instead: you control your cash until a trigger is hit, then the lender takes over the sweep. The OCC describes the mechanics this way: "In a springing dominion arrangement, the bank collects and then transfers the cash receipts to the borrower's account" until the trigger condition occurs (p. 29).
Springing covenants
Asset-based lines usually carry light financial covenants. When there is one, the OCC says it typically takes "the form of a minimum fixed charge coverage ratio," with a definition that varies by borrower, and that such covenants are often springing, meaning "operable only when certain conditions defined in the loan agreements are not met" (p. 24). The usual condition is excess availability falling below a level set in your agreement. For retailers, the handbook says availability covenants "typically require that 10 percent to 15 percent of the borrowing base remain available" (p. 14). Know your trigger number and treat it as your real floor.
If your business carries receivables and inventory, a borrowing base line can be one of the cheaper ways to fund growth. See what you qualify for on Loanistry to compare asset-based and working capital options.
What happens when you are out of formula?
You are out of formula when the loan balance is higher than the borrowing base. The excess is an over-advance, and lenders usually want it repaid quickly or covered with more collateral.
Go back to Cedar Valley. Its largest customer starts paying late, and $300,000 of invoices slide past 90 days. At an 85% advance rate, the borrowing base drops by $255,000, from $1,663,000 to $1,408,000. With $1,300,000 drawn, availability falls from $363,000 to $108,000.
Suppose the agreement springs cash dominion and the coverage test when availability falls below 10% of the commitment, or $200,000. Cedar Valley is now under that line. One more slow customer and it could owe more than its formula allows.
How over-advances are handled
- Bank asset-based lines: The OCC says "most banks do not allow an over-advance in excess of 10 to 15 percent of the borrowing base" (p. 25), and any that are allowed should come with a short, defined repayment plan.
- Planned seasonal over-advances: Some agreements pre-approve extra room during an inventory build. The OCC's example is "a lawn and garden equipment manufacturer" that "may require additional credit availability during the winter months" (p. 3).
- Oil and gas lines: The OCC's Oil and Gas Exploration and Production Lending handbook (Version 2.2) says credit agreements generally require borrowers to "cure any over-advance within 30 days," with cash or more collateral (p. 25).
Pro tip: If you can see an over-advance coming, call the lender before the certificate is due. A borrower who arrives with a plan gets more room than one whose certificate is a surprise.
Which loans use a borrowing base?
Borrowing bases show up wherever collateral value changes often: asset-based revolvers, many bank working capital lines, SBA's monitored working capital lines, and oil and gas reserve-based loans. Term loans and merchant cash advances generally do not use one.
| Loan type | Built on | How often it resets | Who it fits |
|---|---|---|---|
| Asset-based revolver | Receivables, inventory, sometimes equipment | With each certificate, often weekly or monthly | Distributors, manufacturers, wholesalers |
| Bank working capital line with a formula | Usually receivables | Monthly or quarterly, per the agreement | Established B2B companies |
| SBA 7(a) Working Capital Pilot line | Set by the lender within SBA rules | Per the lender's monitoring | Small businesses that want an SBA-guaranteed revolving line |
| Reserve-based lending (oil and gas) | Value of proved reserves | Normally every six months | Exploration and production companies |
| Invoice factoring | Individual invoices sold to a factor | Invoice by invoice | Smaller or newer B2B firms |
SBA working capital lines
SBA describes its 7(a) Working Capital Pilot as a program that "offers monitored lines of credit within the 7(a) loan program." As of November 2026, SBA lists a maximum of $5,000,000, a maximum maturity of 60 months, and a guarantee of 85% on loans of $150,000 or less and 75% above that. The Federal Register notice that created the pilot says it covers both "asset-based and transaction-based lines of credit" and runs through July 31, 2027 (Federal Register, July 15, 2024). The same notice names CAPLines as another SBA delivery method for revolving lines. The detailed borrowing base rules for SBA lines sit in SBA's lender manual, SOP 50 10, so ask an SBA lender for the exact advance rates and reporting schedule on any line you are offered. Our SBA loans overview covers the wider program.
Reserve-based lending in oil and gas
Energy lenders use the same term with different collateral. The borrowing base is the loan value of a producer's proved reserves, set from an engineering report and the bank's price assumptions. The OCC says "banks and independent engineers use a price deck to determine the assumed future price" of production (p. 22), and that "the borrowing base is normally reset every six months" (p. 25). When prices fall, those resets can cut availability sharply.
Borrowing base lines vs factoring
With a borrowing base line, you borrow against a pool of collateral and keep your invoices. With factoring, you sell individual invoices, and the factor often collects from your customers. We compare the two in invoice factoring vs a line of credit, and our guide to asset-based lending covers pricing and lender minimums.
How to increase your borrowing base
Most gains come from shrinking ineligibles, not from a higher advance rate. These steps work at banks and non-bank lenders alike.
- Collect faster. An invoice that crosses three times your terms counts as zero. Send reminders well before that point, and consider an early-payment discount if your margins allow it.
- Watch for cross-aging. Find out the percentage that triggers it in your agreement, flag customers who are getting close, and settle disputes quickly.
- Spread out your customers. If one customer is 30% of receivables and the cap is 20%, the extra 10% is ineligible. Ask for a higher cap on strong, rated customers, or win more mid-sized accounts.
- Cut dilution. Track credit memos, returns and short payments monthly. Staying at or under the 5% level the OCC treats as normal protects your advance rate.
- Clean up inventory. Sell off obsolete stock, keep goods at locations covered by access agreements, and move work-in-process to finished goods quickly.
- Negotiate the definitions before you sign. Aging cutoffs, concentration limits and the lender's discretion over reserves are all negotiable. Our guide to negotiating business loan terms covers how to raise them.
- Report cleanly and on time. Accurate certificates and smooth field exams build the trust that earns better terms at renewal.
When you are ready to compare real offers, see what you qualify for on Loanistry, including asset-based and SBA options.
Sources
- OCC: Comptroller's Handbook, Asset-Based Lending, Version 1.1, checked November 2026
- OCC: Comptroller's Handbook, Oil and Gas Exploration and Production Lending, Version 2.2, checked November 2026
- SBA: 7(a) loans, including the 7(a) Working Capital Pilot, checked November 2026
- Federal Register: 7(a) Working Capital Pilot Program, July 15, 2024, checked November 2026
- Cornell Law School LII: 31 U.S. Code § 3727, Assignments of claims, checked November 2026