The borrowing base is the operational core of asset-based lending (ABL), determining the maximum amount of credit a lender may extend based on the fluctuating value of a borrower’s2 eligible3 collateral. It is the fundamental touchstone that distinguishes asset-based lending from all other financing structures. Originally a rigid calculation strictly tied to domestic accounts receivable and inventory only, the borrowing base has evolved into a highly sophisticated, multi-asset formula driven by data analytics and the aggressive underwriting standards of private debt platforms. This article outlines the underlying theory of the borrowing base, its traditional structure, its transformation over the past 30-plus years and current and emerging borrowing base developments.
Why a Borrowing Base?
Understanding the thesis behind the borrowing base requires an appreciation of underwriting principles, i.e., the struggle to minimize risk, maximize return and pre-bake available exit strategies to address recovery when a credit fails. The borrowing base elegantly addresses all three of these considerations.
First, it minimizes risk by constructing a secured lending framework that builds in collateral cushions in three ways. Second, a lender is protected by the delta between the advance rate applicable to each category of eligible collateral and 100% of its value. In other words, if a lender advances 90% of the amount of eligible accounts receivable, the 10% that is not counted represents a collateral cushion. Third, only a portion of the assets of a type comprising a borrowing base will qualify as “eligible” for inclusion in the borrowing base calculation. For example, where inventory is a borrowing base component, obsolete and damaged inventory generally will be “ineligible” and not contribute to loan availability. Nevertheless, obsolete and damaged inventory is not worthless, and its value is an additional cushion against a lender repayment shortfall. Finally, and often most important, are the assets of the borrower that do not directly support loans or other financial accommodations. These assets, known in the industry as “boot collateral,” may include a first (or second) lien on a broad range of personal and real property and interests, including leasehold interests, intellectual property, machinery and equipment and other rights or assets.
The Old-School Borrowing Base
At its inception, and for many years after its adoption, the borrowing base was a restrictive, algorithmic tool that was almost purely liquidation-focused. Fundamentally, it provided for advances against the “quick assets” that could be easily seized and swiftly “collected out.” In other words, lenders made modest advances — typically against the sum of only 80% to 85% of the amount of eligible accounts receivable plus 50% of the cost of eligible inventory. Even that measured sum was then reduced by “reserves” — amounts that the lender deemed appropriate to deduct from otherwise available credit, to address anticipated costs of access to collateral and the exercise of rights and remedies against it. But in a bygone era during which the ABL lenders were “lenders of last resort,” this dynamic suitably matched the respective underwriting requirements and liquidity needs of lenders and borrowers. Moreover, borrowers and lenders in the ABL space were both prepared to incorporate (and tolerate) the comprehensive manual tracking of assets that required the reporting and review of comprehensive, monthly paper packages that reflected static, historical snapshots of assets and collections that formed the basis for daily liquidity.
Incremental Modernization
From the mid-1990s through the 2010s, the ABL industry and the borrowing base concurrently evolved to reflect ABL’s success4 and the automation of financial and collateral reporting. The ability to view sales, inventory and A/R data in real-time on shared computer networks meant that lenders could minimize their credit exposure and expand their credit offerings without stepping outside their underwriting box.
Technological integration between lenders and their borrower-customers led to a pivot from monthly paper reporting to daily or weekly electronic data reporting — unburdening the back offices of ABL lenders and the staffs of their borrowers’ CFOs (who were once reluctant to barter the administrative burden of ABL reporting for added liquidity). Moreover, for many borrowers, increasing the frequency of borrowing base reporting enhanced loan availability, either generally or seasonally, helping borrowers more smoothly manage their cash requirements.
The evolution of appraisal methodologies in this era also resulted in increases in advance rates on inventory, and the inclusion in borrowing bases of “fixed-asset availability” — a component that enhanced loan availability based on a percentage of the appraised value of machinery and equipment and/or real property interests. In this same historic window, appraisals shifted from a vague, liquidation value focus to a more mature Net Orderly Liquidation Value (NOLV) metric that reflected the expertise of appraisal companies in evaluating what hard assets would fetch in a structured, managed liquidation.
Loan structures and documentation in this era also began to reflect a recognition of the globalization of commerce. Lenders routinely provided eligibility against inventory on the water (in-transit inventory), albeit subject to sublimits and reduced advance rates reflective of the unique risks associated with these assets. Similarly, lenders grew comfortable advancing against foreign accounts receivable (at least from preferred jurisdictions with dependable legal systems).
Expansion into Nuanced Borrowing Base Components
To support asset-light businesses, technology firms and global supply chains, lenders have progressively expanded the parameters of “eligible collateral.” ABL lenders traditionally ignored intangible assets or attributed only boot collateral value to them for underwriting purposes. Modern borrowing bases routinely include components for advances against trademarks, patents and brand equity, provided that the underwriting is supported by third-party appraisals evaluating the standalone licensing or sale value of these asset classes.
For SaaS and technology companies, lenders are swapping out traditional receivables in favor of annual recurring revenue (ARR) or monthly recurring revenue (MRR). Advance rates are calculated against the predictable, contractually committed future cash flows, rather than historic invoices.
Once considered too risky to support advances, work-in-process (WIP) and unbilled revenue are increasingly included in the borrowing bases of service providers and long-term contractors, provided there are clear contractual milestones maximizing the likelihood of ultimate payment. In-transit and foreign availability sublimits and advance rates mentioned above have grown to reflect increased use of specialized insurance policies and increased lender comfort adhering to foreign-law-governed perfection rules with the assistance of counsel.
In sum, the contemporary ABL borrowing base landscape is characterized by digital speed, the use of flexible structural definitions and a recognition of macroeconomic volatility. Full integration of lenders with their borrower’s enterprise resource planning (ERP) systems through secure application programming interfaces (APIs) provides automated, continuous access to a borrower’s ledger. This technology allows for daily adjustments to availability, dynamic reserves implementation and automated lockbox reconciliation — befitting both borrowers and lenders. So-called “stretched” borrowing bases may boost advance rates to new heights, eliminate seasonal caps on inventory availability and/or reduce the impact of traditional eligibility exclusions (for example, by extending cross- aging triggers from 90 to 120 days). Since the COVID disruption, lenders and borrowers have learned together how best to navigate rapid supply chain shifts and inflationary pressures. Accordingly, many modern credit agreements require quarterly or semi annual NOLV inventory appraisals rather than annual reviews, to help ensure that the asset values driving availability accurately reflect real- world market liquidation conditions.
Where Are We Headed?
The massive influx of capital into private debt platforms (nonbank direct lenders)5 is profoundly reshaping the borrowing base construct, morphing ABL from a liquidation backstop to an optimally capital-efficient tool. Private debt funds are leading the charge in pioneering hybrid structures that combine traditional asset formulas with an enterprise value “top-off”. In other words, if physical assets fall short, enterprise value extends a stretch piece deemed secured by the implied enterprise value of the ongoing operating business.
Instead of relying solely on the physical recovery of assets, private debt platforms will increasingly utilize predictive AI and machine learning to construct algorithmic liquidation models. These models will calculate risk using real-time macroeconomic demand indicators rather than historical appraisal data.
Traditional unitranche facilities (blending senior and junior debt) will increasingly incorporate explicit borrowing base mechanisms into a single credit agreement. This approach will increasingly inform dynamic facilities where a portion of the loan acts as a cash-flow term loan and another behaves like an asset-responsive line of credit.
Finally, the next big thing may well be the use of data monopolization as borrowing base collateral. As digital economies continue to scale, private debt platforms will begin valuing and advancing capital against proprietary pools of data, customer list monetization models and digital infrastructure assets that currently lack a standardized liquidation framework. Are lenders, borrowers and markets ready for what lies ahead? Will yields and risks properly align? Will all the capital find a responsible place to go? “Questions are everything. The people who never stop asking are the ones who find answers.” •
1A classic Yogi-ism. Economists’ writings historically have quoted Lewis Carroll’s Alice in Wonderland. May I start a trend among commentators on financing issues and markets of invoking the wisdom of Yankees legend, Yogi Berra?
2Loans and other financial accommodations may be provided to entities that are not borrowers (such as a holding company or other guarantor), notwithstanding that the most conservative lending practice is to “lend to the assets” to minimize fraudulent transfer/conveyance risks.
3We will explore this issue later in this article, i.e., of all collateral of the type against which loans are anticipated to be made, only a subset thereof will qualify to support an advance.
4The 2008 financial crisis heavily validated what seasoned ABL lenders already knew: commercial asset-based lending is a highly resilient, reliable and secure commercial loan structure for lenders. While cash-flow-dependent unsecured lending and loosely structured real estate debt suffered catastrophic losses in the wake of the financial crisis, traditional commercial asset-based lending — which secures loans against liquid business assets like accounts receivable and inventory — experienced minimal losses and remarkably low default rates.
5Ellias, Jared A. & de Fontenay, Elisabeth, The Credit Markets Go Dark, 134 Yale L.J. 779, 2025.
Lon Singer is a senior partner in the Commercial Finance Practice group of Riemer & Braunstein LLP, one of the largest national finance-focused boutique law firms; he is based in the firm’s New York City office.