A business line of credit with a borrowing base carries two numbers, and the second one decides what you can draw. The commitment is the most the bank has agreed to lend. The borrowing base is what your receivables and inventory support today, and what you can draw is the lesser of the two, less what you already owe. Here is how a borrowing base works, how the certificate is built each month, and what it means for a Minnesota manufacturer or distributor whose sales are outgrowing the line.
What a borrowing base is, and why a line has two numbers
A business line of credit is a revolving limit: draw as you need cash, pay interest on what is drawn, and the limit refreshes as you repay. Some commercial lines add one more step. Instead of a fixed amount being available all year, availability is recalculated against the collateral the line is meant to finance, which is the receivables and inventory that turn into cash in the normal course of the business.
That is the borrowing base. Take the receivables your customers owe, remove the ones the loan agreement treats as ineligible, and apply an advance rate. Do the same with inventory. Add the two, compare the result with the commitment, and the lower number is what the line can carry. Subtract the outstanding balance and you have what is available to draw.
It is a structure built for businesses whose working capital need moves with sales. When volume rises, receivables and inventory rise, and so does the borrowing base. When volume falls, the line tightens with it, which protects the business from borrowing against sales it no longer has.
Eligible receivables: what counts and what comes out
The receivables aging is the starting point: every open invoice, by customer, sorted by how long it has been outstanding. Then the loan agreement's eligibility rules take items out. The rules differ from one agreement to the next, and the common ones look like this:
- Invoices more than 90 days past due.
- Cross-aged accounts, where enough of one customer's balance is past due that the whole balance comes out.
- Amounts owed by affiliates or companies under common ownership.
- A single customer's balance above a concentration limit, often stated as a share of total receivables.
- Invoices for goods not yet shipped or work not yet performed, such as bill-and-hold sales.
- Retainage, the share of a contract the customer holds back until the project closes out, which is commonly excluded until it is released.
- Customers who are also suppliers, where the amount you owe them can offset what they owe you.
Concentration is the item manufacturers tend to underestimate. A shop that sells a third of its output to one customer may find part of that customer's balance outside the borrowing base, even when the customer pays like clockwork. That is a structural rule about risk, not a judgment on the customer, and it is worth knowing before a large new contract changes the mix.
Inventory in the borrowing base: raw materials, work in process and finished goods
Inventory counts, but it carries a smaller advance rate than receivables, because it has to be sold and invoiced before it becomes cash. We give value to raw materials and finished goods. Work in process carries little value, since a half-built part is hard to value and harder to sell. Slow-moving stock, consigned goods and product built to one customer's specification often come out as well. We also prefer to lend against inventory together with receivables rather than inventory alone.
Many agreements also cap the inventory portion with a sublimit, so the line leans on receivables rather than on what is sitting on the shelf. For a manufacturer, that has a practical consequence: an order on the floor creates almost no availability while it is being built. The borrowing base catches up when the order ships and the invoice is issued.
Borrowing base advance rates, and a worked example
An advance rate is the share of eligible collateral the lender will lend against. It is set below 100 percent, because returns, credits, discounts and disputes reduce what is actually collected, and the lender needs room to collect if the business stops operating. The OCC's Comptroller's Handbook on asset-based lending sets out how examiners expect banks to measure that dilution and monitor collateral, and advance rates are set loan by loan with it in mind.
Here is how the arithmetic runs on a composite manufacturer. It is not a customer, not a transaction we have financed, and not a quote. The advance rates, the 25 percent concentration limit and the inventory sublimit are illustrative, and a given loan agreement sets its own.
| Receivables | Amount |
|---|---|
| Total receivables on the aging | $1,400,000 |
| Less: invoices more than 90 days past due | ($120,000) |
| Less: cross-aged customer (enough of its balance is past due that all of it comes out) | ($40,000) |
| Less: owed by a company under common ownership | ($30,000) |
| Less: one customer's balance above the 25 percent concentration limit | ($60,000) |
| Eligible receivables | $1,150,000 |
| Availability at a 75 percent advance rate | $862,500 |
| Inventory | Amount |
| Raw materials, less $50,000 of slow-moving stock | $450,000 |
| Finished goods, less $40,000 built to one customer's specification | $260,000 |
| Work in process ($200,000), excluded | $0 |
| Eligible inventory | $710,000 |
| At a 50 percent advance rate, $355,000, capped by a $300,000 inventory sublimit | $300,000 |
| The line | Amount |
| Borrowing base ($862,500 plus $300,000) | $1,162,500 |
| Line commitment | $1,500,000 |
| Lesser of the two | $1,162,500 |
| Less: balance outstanding | ($900,000) |
| Available to draw today | $262,500 |
The line is approved at $1.5 million, and the business can draw $262,500 today. Nothing is wrong with that line. The borrowing base is doing what it is designed to do, holding availability to what the collateral supports this month. When the work in process ships and is invoiced, the new receivable enters the borrowing base at the 75 percent advance rate: a $250,000 invoice adds $187,500 of availability.
Running a line that feels smaller than its limit? Bring last month's agings. We will walk through what is eligible, what is not, and why. Talk with a business banker
The borrowing base certificate, month by month
The borrowing base certificate is the report that recalculates all of this. On a line that carries one, it is due at the interval the loan agreement sets, commonly monthly, and it is usually signed by an officer of the business and sent with three supporting reports: the receivables aging, the payables aging and the inventory report.
The work is mostly bookkeeping you already do. The agings come out of the accounting system, and the certificate applies the same rules every month. The businesses that find it painless are the ones whose agings are clean: invoices issued when goods ship, credits posted when they are given, and customer accounts reconciled. Larger lines may also carry a periodic field exam, in which the lender tests the receivables and inventory behind the certificate.
I would rather a business owner understand their certificate than simply sign it. It is a monthly look at how fast customers pay, how much inventory is turning, and how much room the line has, and that is useful information whether or not a bank asked for it.
How growth changes a borrowing base line of credit
Growth is where a borrowing base earns its keep. A fixed line set two years ago does not know your sales doubled. A borrowing base does, because more sales mean more receivables, and more receivables mean more availability, up to the commitment.
The commitment is where growth meets the ceiling. If the borrowing base regularly runs above the commitment, the collateral supports a bigger line than the one you have, and that is a renewal conversation worth starting early rather than in the week you are short. If availability is regularly tight against the borrowing base, the conversation is different: whether the business needs more equity, a term loan for something that should not be on the line, or a longer look at how quickly customers pay.
The most common cause of a tight line has nothing to do with the borrowing base. It is a long-term purchase funded out of short-term debt. Brian Wagner, our Chief Lending Officer, makes the case in our post on how a business line of credit works: short-term needs belong on short-term debt and long-term needs on long-term debt. A machine bought out of the line uses availability the receivables were supposed to support, and our warning signs post for manufacturers covers what follows when a line is undersized or misread.
Which lines carry a borrowing base, and which do not
Not every line of credit carries one. At our bank, revolving and seasonal business lines over $200,000 generally carry a borrowing base certificate, with revolving lines secured by real estate the main exception. A line of $200,000 or less is generally set at a fixed amount and reviewed at renewal. That describes the larger working capital lines of a lot of manufacturers, distributors and wholesalers. Our manufacturing business loans and banking page lays out how we size a line to a manufacturer's cash cycle, alongside equipment, plant real estate and treasury.
Farm lending works differently here. Our agricultural lines are not subject to borrowing base certificate reporting, so for a farm the annual operating line renewal is when the paperwork is due.
What to have ready when you ask about a borrowing base line
A borrowing base line starts from the same file as any commercial request, with more weight on the working capital reports. If I were preparing for that conversation, I would start with clean agings, because they drive everything else. Having these ready shortens the process more than anything else:
- Three years of business financial statements and tax returns, plus a current interim statement.
- A current receivables aging and payables aging, by customer and vendor.
- Inventory detail by raw materials, work in process and finished goods, and how you count it.
- Your largest customers and their share of sales.
- Personal financial statements for owners and guarantors.
Our guide to getting a business loan in Minnesota walks through the process from first conversation to closing, and our business financing page covers the full range of lines and loans.
Questions business owners ask about borrowing bases
What is a borrowing base?
A borrowing base is the amount a lender will advance against a business's eligible receivables and inventory, calculated by applying an advance rate to each. On a line of credit that carries one, the business can draw up to the lesser of the line's commitment and the borrowing base, less what is already outstanding. As receivables and inventory grow, the borrowing base grows with them, up to the commitment.
What is a borrowing base certificate?
A borrowing base certificate is the periodic report a business sends its lender to recalculate the borrowing base, commonly monthly. It totals receivables and inventory, subtracts the ineligible items the loan agreement defines, applies the advance rates, and shows the resulting availability. It is usually sent with a receivables aging, a payables aging and an inventory report, and an officer of the business signs it.
What makes a receivable ineligible?
Each loan agreement defines it, and common exclusions include invoices more than 90 days past due, all of a customer's balance when enough of it is past due, amounts owed by affiliated companies, balances above a single-customer concentration limit, invoices for goods not yet shipped, and retainage. Receivables from foreign or government customers are often treated separately.
Which lines of credit need a borrowing base certificate?
At our bank, revolving and seasonal business lines over $200,000 generally carry one, with revolving lines secured by real estate the main exception. Lines of $200,000 or less generally do not, and neither do our agricultural lines.
Why don't lenders advance 100 percent of receivables?
Because a receivable is not cash yet. Returns, credits, discounts and disputes reduce what is collected, and a lender also needs room to cover the time it takes to collect if a business stops operating. The advance rate leaves that margin. Inventory usually carries a smaller advance rate than receivables, because it has to be sold before it becomes a receivable at all.
Do farm operating lines carry a borrowing base?
Not at our bank. Our agricultural lines are not subject to borrowing base certificate reporting, so the annual renewal is when the paperwork is due. Borrowing base reporting applies to some commercial lines of credit, and the loan agreement for a given line says whether it does.
Start with the lender who leads your market
A borrowing base is easier to understand across a table than on a certificate. If your line feels smaller than its limit, a large order is coming that will change your receivables, or you are not sure whether your line carries a borrowing base at all, the right time to talk is before the month you are short. Brian Wagner leads our lending, and a senior lending officer leads each of our three markets. Stop in at any of our branches and ask for a lender, or start with the person who leads yours.
-1.jpg?width=118&height=118&name=Brian%20Wagner%20(2)-1.jpg)
Brian WagnerChief Lending OfficerLeads the bank's lending.
Kevin HeglandSVP, Senior Lending Officer, Carver CountyLeads our lending team in Carver County.
Luke BakerSVP, Senior Lending Officer, McLeod CountyLeads our lending team in McLeod County.-1.jpg?width=118&height=118&name=Ward%20Greeley%20(1)-1.jpg)
Ward GreeleySVP, Senior Lending Officer, Twin Cities MetroLeads our lending team across the Twin Cities metro.
Growing faster than your line? Send us your current agings and the line you have today. We will show you what your receivables and inventory support. Talk with a business banker
- Keep reading
- How a business line of credit works in Minnesota, and how to build the debt stack.
- Manufacturing business loans and banking for equipment, working capital and plant real estate.
- Five signs your manufacturing business has outgrown its bank.
- How to get a business loan in Minnesota, from first conversation to closing.
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Growing, together.
The worked example is a composite built to show how a borrowing base is calculated. It is not a customer, not a transaction we have financed, and not a quote. Advance rates, eligibility rules, sublimits and reporting terms vary by loan, and each line's loan agreement governs. All credit is subject to approval. This post is general information, not legal, accounting or financial advice. Page last reviewed October 2026.
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