A Borrowing Base is the amount of money that a lender is ready to lend to a business depending on the value of the collateral that the business commits. The borrowing base is often decided by a process known as "margining," in which the lender calculates a discount factor, which is then multiplied by the value of the collateral in question. The resultant numerical value reflects the amount of money that will be loaned to firm by lender.The margin calculation takes into account both how quickly and easily assets can be converted into cash, as well as how much risk exists should something happen to those assets before they could be sold off. For example, if ABC Corporation has pledged its inventory as collateral against a loan from XYZ Bank, XYZ may decide that it needs only a 20% margin on ABC's inventory in order to feel confident about lending money against it. This means that XYZ would only lend 80% of what ABC's inventory was worth (the 20% margin), since there is always some risk associated with loans backed by physical assets like property or inventories.Importantly, businesses can negotiate their borrowing bases with their lenders; if ABC feels like its margins are too low given current market conditions, it may be able to get XYZ Bank to increase them somewhat through negotiation. Conversely, if XYZ thinks that ABC's margins are too high given current economic conditions - for instance because commodity prices have fallen significantly - then it may try and reduce them through negotiation.
