Borrowing base

Definition

The share of receivables and inventory a credit line will lend against.

Why It Matters

A line of credit is not a fixed amount, it is a formula, and the formula is what decides whether cash is there in a slow month. A lender typically advances against recent receivables and a smaller share of inventory, excludes anything aged past ninety days, and excludes balances owed by a customer who is also a supplier. Two consequences for a new owner: collections discipline directly raises how much can be drawn, and a single large slow-paying customer can shrink the line at exactly the moment it is needed. Ask for the formula in writing before signing.

In numbers: Advancing 80% on $300k of current receivables and 50% on $100k of inventory gives a $290k line, not the $400k of assets behind it.