Today we continue the conversation around your borrowing base. This episode dives deeper into why you may want to consider a borrowing base to finance your working capital so that you can help your business meet its potential. We also discuss the importance of having healthy accounts receivable, and how to use it in the right way.

The best time to use your borrowing base is to fund growth in your business. You can leverage assets for other projects, and you can also use it as a temporary means for a short-term slow down. It’s not a good idea to use it to fund losses within the business. If you run up this line of credit to the limit, you have already harvested the value of your business, so don’t go buying a yacht or making any impulsive purchases.

Size matters when it comes to accounts receivable. Most banks won’t provide a borrowing base if yours is under $1 million. They also consider whether or not you have healthy accounts receivable versus overdue accounts receivable, which is anything beyond the 90-day mark.

You don’t need the bank to do the math for you. In fact, it’s an excellent exercise in discipline as a business owner to run your own sample evaluation so you can understand your own AR outside of just letting the bank do it. It’s important to note that potential buyers of your business will also want to know the fully optimized business valuation to determine your enterprise value.

When things get really tight, you have options. If you have customers who are approaching the 90-day overdue mark, you can negotiate and open a dialogue. It’s also a good idea to drill down into other strategies. Look at your competitive advantage and business culture.