# How to Calculate a Borrowing Base

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The borrowing base is the amount of credit a lender will give a business based on the dollar value of collateral. Most lenders use a margining technique to calculate these loan amounts, applying a discount factor to the value of collateral to determine how much the business can borrow.

Calculate company inventory by adding the value of each item that the company sells. An inventory item is an item that was bought or produced to be sold.

Calculate the value of company equipment, which includes any item bought to be used by employees to run the business. Add up all the company equipment values.

List all accounts receivable information. Accounts receivable information is any amount of money the company should receive. An example would be payments on customer invoices.

Calculate company collateral. The company collateral is specified by the lender and can be inventory, equipment and\or accounts receivable.

Identify the lender discount factor. The lender discount factor is the percentage that is multiplied by the company collateral amount to determine the borrowing base. Depending on the lender's preference for collateral, the easier the collateral may be converted to cash the higher the discount factor will be.

Calculate the borrowing base by multiplying the company collateral with the discount factor. If the collateral amount is \$50,000 and the discount rate is 50 percent -- or 0.5 -- the borrowing base is \$25,000.

## Tips & Warnings

• The specific amount of the borrowing base is determined by the agreement from the lender and the company.

## References

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