A borrowing-base case tests a different question from a debt-service ratio. It asks how eligible collateral, advance terms and reserves constrain facility usage. This fictional example is a practice problem; it is not a loan agreement, a recommendation or a statement of any lender’s policy.
Build the base from eligible assets
Assume eligible receivables of 2.4 million with a 75% advance rate, eligible inventory of 1.0 million with a 50% rate, and reserves of 0.3 million. Assume those are the only components and that the stated rates apply to the full eligible amounts.
| Component | Calculation | Contribution, millions |
|---|---|---|
| Eligible receivables | 2.4×75% | 1.8 |
| Eligible inventory | 1.0×50% | 0.5 |
| Reserves | Subtract 0.3 | −0.3 |
| Borrowing base | 1.8+0.5−0.3 | 2.0 |
A 2.2 million facility draw exceeds the simplified base by0.2 million. If cash on hand is 0.15 million, that amount alone is 0.05 million short of a 0.2 million cash cure. Do not call a cure legally required until you have the agreement’s definition, timing and permitted alternatives.
Explain eligibility before arithmetic
The case supplies eligible assets, not total assets. In a real analysis, investigate aging, concentration, disputes, offsets and other contractual exclusions. An advance rate applied to revenue is not the same calculation as an advance rate applied to qualifying receivables.
Fictional interview response: “Using the supplied eligible amounts and reserves, I calculate 2.0 million against 2.2 million drawn. I would check the certificate date, exclusions, reserve definitions and cure provisions before concluding what action is required.” That answer shows the arithmetic and its boundary.
Stress the source of the deficit
Suppose eligible receivables fall by 0.4 million because collections or eligibility change, with all other assumptions held constant. The receivable contribution falls by 0.4×75%=0.3 million. The base falls from 2.0 to 1.7 million; the same 2.2 draw is then 0.5 million above the base. Identify why eligibility changed rather than merely reporting the new result.
| Question | Why it matters |
|---|---|
| Is the aging data current? | A stale certificate can hide a changed position |
| Are exclusions or reserves double-counted? | The base can be understated or overstated |
| Does a customer concentration limit apply? | Total eligible balances may need another adjustment |
| When must the borrower report or cure a deficit? | Timing depends on actual terms |
| What causes the operating cash need? | Collateral availability does not explain the business cash cycle |
Keep the two analyses separate
Borrowing-base availability is not annual debt-service coverage. A borrower might meet a collateral test yet have a weak operating cash outlook, or generate cash but face a temporary eligibility deficit. Investigate both without claiming that one number establishes overall credit quality.
The OCC commercial-loans handbook describes receivable eligibility and collateral-analysis context. Actual facilities use their own definitions; do not treat this simplified exercise as those terms.
Work through the credit-analyst interview guide, compare the corporate-banking memo case, and use the credit-analyst resume guide to label educational analysis accurately. The next step is to explain the mechanism, not add an impressive lending decision you did not make.
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