# Borrowing Base: Definition, How It's Determined, and Example

## What Is a Borrowing Base?

A borrowing base represents the total loan a lender is willing to extend to a company, derived from the value of pledged collateral. Using "margining," lenders apply a discount rate to asset values to mitigate risks and establish a reliable credit limit for businesses.

### Key Takeaways

*   A borrowing base is the maximum loan amount a lender will provide to a company based on the value of its collateral.  
    
*   The borrowing base is determined using a discount factor applied to the collateral's value, which reflects the risk perceived by the lender.  
    
*   Common types of collateral include accounts receivable, inventory, and equipment, which can impact the calculated borrowing base.  
    
*   Borrowing bases offer security to lenders by being adjustable, depending on fluctuations in collateral value.  
    
*   Lenders may require detailed business information and perform regular assessments to maintain accuracy in the borrowing base calculations.

## How Borrowing Bases Work

Various assets may be used as [collateral](https://www.investopedia.com/terms/c/collateral.asp), including [accounts receivable](https://www.investopedia.com/terms/a/assignment-of-accounts-receivable.asp), inventory, and equipment. If a company approaches a lender to borrow money, the lender will assess the borrowing company's strengths and weaknesses.

Based on the perceived risk the lending company associates with loaning money to this company, a discount factor is then determined—say 85%. In this scenario, if the borrower provides $100,000 in collateral, the lender will loan 85% of that, totaling $85,000. Oil and gas companies might [borrow against the production of a field or proven order quantity](https://www.investopedia.com/terms/v/volumetric-production-payment.asp), with the lender receiving a monthly quota in return.

> **Important**
>
> A borrowing base is the amount of money a lender is willing to loan a company, based on the value of the collateral the company presents.

## Reasons Lenders Rely on Borrowing Bases

Lenders feel more comfortable making loans rooted in borrowing bases since those loans are made against specific sets of assets. Furthermore, the borrowing base can be adjusted downward to protect the lender. If the collateral's value drops, the [credit limit](https://www.investopedia.com/terms/c/credit_limit.asp) decreases as well. Conversely, if the collateral's value rises, the borrowing base can increase to a set limit.

## Detailed Mechanics of Borrowing Bases

The borrower must also provide the lender with certain information used to determine the borrowing base, including data on sales, collections, and inventory. For larger asset-based loans, borrowers often need to regularly provide lenders with certificates detailing their business operations. For example, the certificate might itemize a company's eligible receivables, if the borrowing base is determined by that consideration.

Lenders may conduct regular investigations of a company, to check up on the borrower’s business operations. Lenders might send appraisers to assess collateral value and check for significant changes in worth.

## Real-World Example of Borrowing Base

Cabot Oil & Gas Corporation did not have any borrowings outstanding under its [revolving credit facility](https://www.investopedia.com/terms/r/revolving-loan-facility.asp) as of March 31, 2016. Since then, on the first day of every April, its borrowing base is annually redetermined, although the lender is at liberty to request a redetermination whenever Cabot acquires or sells oil and gas properties. On April 19, 2016, the borrowing base was lowered from $3.4 billion to $3.2 billion.

## The Bottom Line

A borrowing base is a critical financial tool that defines the maximum amount a lender is willing to loan a company based on the value of its collateral. Lenders often utilize margining to establish a discount factor, which typically results in loans representing a percentage of the pledged collateral's value. The borrowing base can be adjusted periodically to reflect changes in the collateral's value, offering protection to lenders and flexibility to borrowers.

Accurate reporting and assessments ensure that the borrowing base is effectively managed, with regular evaluations by lenders safeguarding the process. Understanding how borrowing bases are determined provides companies with the knowledge necessary for securing financing while managing risks effectively.

> **Article Sources**
>
> 1.  U.S. Securities and Exchange. "[Cabot Oil & Gas Corporation Form 10-Q, March 31, 2016](https://www.sec.gov/Archives/edgar/data/858470/000085847016000049/cog-03312016x10q.htm#s0DC05117F2C0A885D613A5AE33BEAF5C)," Page 8.