Understanding a borrowing base certificate

Definition

A borrowing base certificate is the periodic report you send a lender to prove which collateral still qualifies. On the books, this is working paper, not an account you post to.

You prepare it so the lender can recompute the Borrowing Base and compare that cap to what you have drawn. The loan and the collateral stay on the Balance Sheet; this report is the proof sitting behind them.

Cash-basis and accrual books both leave this report off the statements. Nothing about signing and sending it, by itself, moves cash.

This report is not the cap and not the owe. It is the package of lines that shows how those two numbers were built this period.

Where it shows up

Balance Sheet: Related to the collateral this report proves.

P&L: Related to the close that feeds the numbers on it.

See also: Borrowing Base · Accounts Receivable Aging · Line Of Credit

When you look at your Balance Sheet, you will not find this report as a line. You will find the receivables and the inventory it is proving, and you will find the Line Of Credit whose cap it supports.

A thick file of certificates does not mean the shop has more collateral. A missed certificate can freeze draws even when the assets are still there.

The profit and loss statement does not list this report. The related work is the Month-End Close that produces the totals copied onto it.

On the Statement of Cash Flows, sending the report does not post. Cash still moves when you draw or repay the line; the certificate is not that event.

Accounts Receivable Aging is the usual source for the receivable lines. The inventory listing is the usual source for the stock lines.

How it works

The report gets built after the close, on the cadence the agreement sets, often weekly or monthly. You start with receivable and inventory totals that match the statements you just issued.

Ineligible invoices and ineligible stock are listed next, using the codes in the agreement. Advance rates are applied to what remains, and the resulting cap is compared to the amount outstanding on the line.

Stay with this report: it is the proof, not the formula's name and not the draw. The Borrowing Base is the cap the lines compute, and the line still holds only what you have drawn.

Someone who can bind the company usually signs it. The lender then checks the lines against the aging, the stock listing, and the loan balance on its own side.

If the certificate is late, wrong, or shows an overadvance, the lender can freeze new draws or require a paydown. Fixing the file is a revised report, not a journal that "corrects" the cap.

A Covenant often makes a timely, accurate certificate a required test. Missing the date can be a default even when the eligible numbers would have been fine.

Reconcile every total on the report to the same close you issued. A certificate that does not tie to the Income Statement period's ending Balance Sheet is how lenders lose trust in the file.

On cash-basis books the aging and the inventory listing can still be built. Many Asset-Based Lending agreements still want accrual totals on this report.

Example

An apparel wholesaler has $150,000 of receivables and $80,000 of inventory at month end. Ineligible invoices over 90 days and affiliate invoices total $30,000, and ineligible stock totals $20,000.

Eligible receivables are then $120,000, and eligible inventory is $60,000. At 80 percent and 50 percent advance rates, the cap on the certificate is $96,000 plus $30,000, or $126,000.

The line is drawn at $100,000, so the certificate shows $26,000 of availability. No journal posts when the wholesaler signs and emails that file.

If the next aging shows another $10,000 of invoices rolling past 90 days, eligible receivables fall to $110,000. The same certificate form would then show a $118,000 cap against the still-drawn $100,000.

The $100,000 owe does not change because the form changed. Only a later draw or repayment would move the line.

Common mix-ups

A borrowing base certificate is not the Borrowing Base. The base is the eligible cap; this report is the worksheet that proves that cap this period.

This report is not the loan. The Line Of Credit is the amount drawn; sending the certificate does not borrow or repay a dollar.

This report is not Accounts Receivable Aging. The aging feeds the receivable lines; the certificate is the signed summary the lender keeps in the file.

Related terms

• Borrowing Base: The pool of receivables and inventory that determines how much a lender will advance.
• Accounts Receivable Aging: A report bucketing open invoices by how long they have been outstanding.
• Line Of Credit: A revolving loan the business can draw on and repay as cash needs change.
• Asset-Based Lending: Borrowing secured by receivables, inventory, or equipment rather than general credit.
• Inventory: Goods held for sale or used to produce goods for sale.
• Covenant: A condition in a loan agreement the borrower must keep meeting.
• Month-End Close: The monthly version of the close, ending in issued financial statements.
• Supporting Schedule: A detailed worksheet backing up a single line on the financial statements.