Borrowing Base

What Is a Borrowing Base?

A borrowing base is the maximum amount a lender will advance on a revolving line of credit, calculated as a percentage of eligible collateral — typically accounts receivable and inventory. It is the mechanism that connects your line of credit availability to the actual assets backing it.

Unlike a term loan, which has a fixed balance that amortizes over time, a revolving line of credit fluctuates based on your borrowing base. As your receivables grow — typically during busy seasons — your available credit grows with them. As receivables are collected and balances fall, availability contracts. The line is self-liquidating by design.

For contractors, the borrowing base is most commonly tied to accounts receivable. Understanding how your lender calculates it — and what makes receivables eligible or ineligible — directly affects how much of your line you can actually draw on when you need it.

How Lenders Calculate the Borrowing Base

Lenders start with your total accounts receivable and then apply a series of filters to arrive at eligible receivables. The borrowing base is then calculated as a percentage — typically 70% to 85% — of those eligible receivables.

The filters that make receivables ineligible vary by lender but typically include:

Receivables over 90 days old. Once an invoice is more than 90 days past due, most lenders exclude it from the borrowing base entirely. Some lenders use 60 days. The logic is that older receivables have a higher probability of being uncollectible.

Cross-aged receivables. If more than 25% to 50% of a single customer's total balance is over 90 days old, many lenders will exclude the entire balance for that customer — not just the aged portion. This is called the cross-aging rule and catches contractors by surprise more often than any other provision.

Concentration limits. Most lenders cap the amount of receivables from any single customer that can be included in the borrowing base — commonly 20% to 25% of total eligible receivables. If one customer represents 40% of your receivables, the excess above the cap is excluded.

Retainage. Retainage — the portion of a contract payment withheld until project completion — is typically excluded from the borrowing base because it is not yet due and payable. For contractors with significant retainage balances, this can meaningfully reduce borrowing base availability.

Related party receivables. Amounts owed by affiliated companies, owners, or related parties are typically excluded.

Government receivables. Some lenders exclude or limit government receivables due to the assignment restrictions under the Assignment of Claims Act, though many lenders now include properly assigned government receivables.

The Formula

Borrowing Base = Eligible Receivables x Advance Rate

Available Credit = Borrowing Base - Outstanding Line Balance

A Worked Example

A mechanical contractor has the following accounts receivable at month end:

Total accounts receivable: $1,850,000

Ineligible receivables:

• Over 90 days: $145,000

• Cross-aged (customer over concentration limit): $210,000

• Retainage: $185,000

• Related party: $40,000

• Total ineligible: $580,000

Eligible receivables: $1,850,000 - $580,000 = $1,270,000

Advance rate: 80%

Borrowing base: $1,270,000 x 0.80 = $1,016,000

Outstanding line balance: $400,000

Available credit: $1,016,000 - $400,000 = $616,000

This contractor has $616,000 available to draw on their line of credit at this point in time. If they collect $300,000 in receivables next week, their outstanding balance drops and their availability increases — but only if the collected receivables were in the eligible pool. Collecting ineligible receivables does not increase availability.

Why Borrowing Base Availability Fluctuates

Contractors often discover that their line of credit availability is lower than expected precisely when they need it most — at the beginning of a large project when costs are being incurred but billings have not yet been collected.

Several factors drive this:

Overbilling and underbilling. If your contracts are underbilled — you have done more work than you have invoiced — your receivables are lower than your actual earned revenue. Billing current keeps receivables up and borrowing base availability up.

Seasonal patterns. Contractors who slow down in winter often collect receivables from fall work during the slow season, which reduces the receivable balance and contracts the borrowing base at exactly the time cash flow is tightest.

Customer concentration. A contractor heavily dependent on one or two large customers may find their borrowing base constrained by concentration limits regardless of their total receivable balance.

Managing Your Borrowing Base

Bill promptly and consistently. Every day between completing work and submitting an invoice is a day that receivable does not exist in your borrowing base. Accelerating billing cycles directly increases availability.

Monitor aging aggressively. Receivables approaching 90 days need immediate attention — not just because they may be uncollectible, but because they are about to fall out of your borrowing base. A receivable collected on day 89 is worth significantly more to your borrowing base than one that ages past 90.

Understand your cross-aging provisions. Review your line of credit agreement for the specific cross-aging language. Knowing which customers are at risk of triggering cross-aging lets you prioritize collections accordingly.