On today’s episode, we’re discussing the mechanics of a borrowing base. This is an episode that will have value in the current economy, and will still have value in future economies. Discussion will involve current events, but ultimately, the goal is to provide solutions that will be applicable in any economy. This is a tactical and technical episode to explain how borrowing base works (and can work) for you.
Although borrowing base doesn’t sound as important as other issues in regards to business ownership, it really deserves its own episode. In a tough economy, it will provide the opportunity for you to help your business survive. It is most important to understand the discipline behind it, and to utilize it in the right way for the right reasons.
Essentially, banks will lend an advanced rate against your assets. Their lending is based on your inventory and accounts receivable. In this way, you can leverage the dollars that are trapped in your business to use wherever you need them. This is a real advantage for businesses who are trying to survive in today’s economy.
The advanced rate the bank will provide is based on the type of asset you are leveraging. They typically require weekly or monthly self-reporting and operate on an honor system in that reporting. The inventory must be raw material that can be sold in the case of debt recovery.
You can leave this line of credit open in perpetuity, but you have to be very careful with how you use it, or your borrowing base could become an upside-down loan. This can lead to a downward spiral if you keep paying for losses in your business.
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