Instructor Blog - Loan Documentation

Q: Would you please explain what a borrowing base is? If we must change a UCC because of a change in borrower name or location, does it follow that we also change the security agreement and other documents tied to the original agreement?

A: A borrowing base is the maximum amount a lender will advance on a specific type of collateral.  A borrowing base certificate is the official document that would show the lender's calculation of how much money they can lend based on the amount of eligible collateral.  Borrowing bases usually apply to accounts receivable (A/R)  or inventory where eligibility is often defined as A/R or inventory less than a certain number of days on the books.   The amount of eligible AR or inventory is the starting point for the borrowing base calculation.  For example, if the lender had eligible A/R as all A/Rs<90 days, then the balance of all A/Rs <90 days would be multiplied by the agreed upon advance rate for A/Rs, aka the borrowing base. Typically for A/Rs the borrowing base advance rates range from 50-80%, depending on the type and quality of the A/Rs.  For inventory, the borrowing base advance rates are usually less (in 25-50% range) due to the higher risk associated with advancing on Inventory.  If the borrowing base was 50% of A/R only, then the maximum advance on the line of credit for A/Rs would be equal to 50% of the eligible A/R balance. 

In addition to updating your UCC filings, if a borrower has a change of name or location, these changes need to be reflected as appropriate in your loan records and files. The lender would want to assess what updates to the documents are necessary in each situation.    A change of business name definitely warrants, at minimum, amendments or modifications to the original documents.  

Course overview: Commercial Business Loan Documentation