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Borrowing base equals eligible AR times its advance rate, plus eligible inventory times its rate. Then reserves get subtracted. That number is your actual draw availability today, not your credit limit.
Your credit facility might say $2 million. Your borrowing base certificate might say $1.1 million is available today.
That gap catches new asset-based borrowers off guard every time. The borrowing base is the actual math your lender runs against your receivables and inventory. It decides what you can draw, not the number printed on your term sheet.
For the short definition, see our glossary entry on borrowing base. This article is the full walkthrough: the formula, a worked example, and a calculator.
The formula itself has four moving parts. Lenders multiply eligible receivables by an AR advance rate. They multiply eligible inventory by a separate inventory rate.
Then they subtract reserves for risk. Not every dollar of AR or inventory counts toward that total.
This page covers the national mechanic: the formula, the terminology, and the math itself. See our Utah manufacturer borrowing base guide for the applied, calculator version.
Lenders don't hand you the entire limit on day one. They rerun this formula every reporting period, and the number moves with your collateral.
This distinction matters most for inventory-heavy or receivables-heavy businesses. A standard unsecured line of credit doesn't work this way at all.
See our collateral guide for how secured and unsecured lines compare more broadly.
Key Takeaways
- Borrowing base = (eligible AR × AR advance rate) + (eligible inventory × inventory advance rate) − reserves.
- AR advance rates typically run 70%–90%, with high-quality receivables commonly landing at 80%–90% (cross-referenced across industry ABL lender publications).
- Inventory advance rates typically run 40%–65%, with finished goods commonly advanced at 40%–60%.
- Raw materials and work-in-progress are frequently excluded from eligibility, or advanced at a steep discount to finished goods.
- Receivables aged more than 90 days past invoice date are commonly excluded from the eligible pool entirely.
- Single-customer concentration above a lender-set cap, often 20%–25% of total AR, gets carved out of eligibility.
- Monthly borrowing base certificates are standard for active asset-based facilities. Some require weekly submission.
- ABL monitoring costs commonly blend to roughly 1% commitment fee plus roughly 0.5% monitoring fee (industry ABL advisory sources).
- One disclosed example: a $150 million revolver at 60% average utilization carried roughly $400,000 a year in monitoring costs.
- AR typically carries a higher advance rate than inventory because it converts to cash in fewer steps.
- Inventory is usually advanced against cost or orderly liquidation value, not retail price.
- The net number after reserves, not the facility limit, is your actual draw availability.
In This Guide
| AR Contribution | – |
| Inventory Contribution | – |
| Gross Borrowing Base | – |
| Less Reserve | – |
| Net Borrowing Base (Draw Availability) | – |
This is an illustrative estimate, not a lender's actual calculation. Real facilities apply concentration limits and dilution reserves that vary by lender.
The Borrowing Base Formula, Step by Step
Borrowing base equals eligible AR times the AR advance rate. Add eligible inventory times the inventory advance rate. Then subtract reserves.
Run real numbers through it and the mechanic gets clear fast.
Here's a full worked example, line by line.
These numbers aren't picked at random. They sit within the typical ranges published across ABL lender sources. So the math mirrors what a real facility might return.
| Line Item | Amount | Calculation |
|---|---|---|
| Eligible Accounts Receivable | $500,000 | Base collateral pool |
| AR Advance Rate | 85% | Applied to eligible AR |
| AR Contribution | $425,000 | $500,000 × 85% |
| Eligible Inventory | $300,000 | Base collateral pool |
| Inventory Advance Rate | 50% | Applied to eligible inventory |
| Inventory Contribution | $150,000 | $300,000 × 50% |
| Gross Borrowing Base | $575,000 | $425,000 + $150,000 |
| Dilution Reserve | −$25,000 | Lender-set risk holdback |
| Net Borrowing Base (Draw Availability) | $550,000 | $575,000 − $25,000 |
Plug the same five numbers into the calculator above. It returns the identical $550,000 net borrowing base.
That $550,000 is your actual draw availability, not the $575,000 gross figure.
Sometimes the borrowing base comes in lower than the facility limit suggests. Read on if the borrowing base doesn't cover what you were hoping to draw.
Why AR and Inventory Get Different Advance Rates
Receivables convert to cash in one step: the customer pays the invoice. Inventory needs two steps: it has to sell, then the sale has to collect.
More steps mean more risk. That's why AR usually gets the higher advance rate of the two.
Lenders also price off liquidation value, not retail value. What could a lender recover if it had to seize and sell the collateral fast?
Finished goods sold at a fire-sale price recover less than their sticker price. Raw materials recover even less, since they're one more step removed from a sale.
That's the real logic behind every advance rate in this article. Distance from cash, and certainty of recovery, drive the number down.
What Makes Receivables 'Eligible' vs. 'Ineligible'
Eligible receivables are invoices your lender will actually count. Ineligible receivables get carved out before any advance rate applies.
For the formal definition, see our glossary entry on eligible receivables.
- Receivables aged more than 90 days past invoice date
- Concentration above a lender-set cap, often 20%–25% of total AR from one customer
- Affiliate or related-party receivables
- Foreign or government receivables without additional credit support, such as insurance or a letter of credit
Each of these exists to protect the lender against collection risk. A single large customer going bankrupt shouldn't collapse your entire facility.
Concentration caps surprise growing companies the most. Land one big account, and a large share of AR can age out of eligibility. That happens even when every invoice is current and collectible.
Dilution is a related but different problem. Customer disputes, returns, and early-pay discounts all reduce what an invoice actually collects.
Lenders track your dilution rate over time. A rising dilution rate often triggers a bigger reserve. That lowers your net borrowing base, even if gross AR looks fine.
What Makes Inventory 'Eligible' vs. 'Ineligible'
Eligible inventory usually means finished goods ready to sell. Raw materials and work-in-progress get discounted or excluded outright.
Finished goods commonly carry the full inventory advance rate. Raw materials and WIP often get a lower rate, or nothing at all.
Obsolete or slow-moving inventory is a common exclusion too. So is consigned inventory, since your business doesn't actually own it.
Valuation method matters too. Lenders advance against cost, not retail price. Larger facilities often require a professional appraisal to confirm it.
An orderly liquidation appraisal estimates what inventory would fetch in a controlled sale. That figure, not your catalog price, sets the eligible base.
Seasonal businesses feel this hardest. Seasonal inventory swings change the borrowing base month to month, sometimes by a wide margin.
That's why seasonal inventory financing gets structured differently from a standard revolving line.
How to Increase Your Borrowing Base
None of these fixes happen overnight. Each one moves the borrowing base in a real, measurable way.
Clean AR aging is the fastest lever. Collect or write off invoices before they age past 90 days.
Diversify your customer base where you can. A single account creeping past the concentration cap shrinks your eligible pool. That happens even as revenue grows.
Keep inventory records current. An outdated count understates what you actually have on the floor. Lenders can only advance against what's verified.
Move inventory toward finished goods faster. Every day spent as raw material or work-in-progress sits at a lower advance rate. Some categories get no advance rate at all.
Negotiate advance rates at renewal, not mid-term. Lenders revisit rates when your collateral quality and payment history have measurably improved.
Ask what's driving your reserves. A dilution reserve tied to a specific customer dispute may shrink once that dispute resolves. It's worth asking your lender directly.
How Often the Borrowing Base Is Recalculated
Monthly borrowing base certificates are standard for active asset-based facilities. Some lenders require weekly submissions during a field exam cycle.
Each certificate resets the eligible AR and inventory pools. Reserves and dilution adjustments get reapplied every time.
Lenders often check your DSCR at the same time. Collateral coverage and cash flow coverage answer two different questions.
Someone at your company, usually a controller or CFO, signs each certificate. Overstating eligible collateral on a certificate is a serious problem.
It can trigger a default under the credit agreement, even if the overstatement was accidental. Lenders take certificate accuracy seriously because they're relying on it to manage their own risk.
A well-run finance team treats the certificate as a discipline, not paperwork. That habit alone can prevent covenant surprises.
Field exams and ongoing monitoring aren't free. ABL monitoring costs commonly blend to roughly 1% commitment plus roughly 0.5% monitoring fee.
On larger facilities, this scales up fast. One disclosed example: a $150 million revolver at 60% average utilization. It carried roughly $400,000 a year in monitoring costs.
See how field exam and monitoring fees tie into the fee structure.
Know your real draw availability before you apply.
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Check My OptionsFrequently Asked Questions
Methodology: How We Built This Explainer
The advance rate ranges in this guide come from multiple industry lender publications. We cross-referenced them for consistency before publishing.
AR advance rates commonly run 70%–90%, with high-quality receivables landing at 80%–90%. Inventory advance rates commonly run 40%–65%, with finished goods landing at 40%–60%.
The monitoring cost figures are illustrative, not universal. They come from industry ABL advisory publications. One disclosed example covers a $150 million facility.
We did not use single-lender marketing claims as a stand-alone source. Every range in this guide is cross-referenced against more than one publication before inclusion.
Your own facility's rates, caps, and reserves will differ. Confirm current terms directly with your lender before relying on any figure here.
Run the calculator above with your own numbers before your next draw request. The formula doesn't change. Only your collateral does.
Financial Disclaimer: Figures in this article are estimates, not lender quotes. They're based on industry-standard advance rate ranges and one disclosed example. Your own terms will vary by lender, industry, and collateral quality.
This content does not constitute financial advice. Meridian Private Line is a marketing affiliate. See our full disclosure policy.
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