FAQs
Ø What is a borrowing base?
Borrowing base loans are credit facilities that are secured in full by way of collateral furnished either
by the borrower or a third party. The borrower’s current assets (usually accounts receivable and goods)
serve as collateral for a flexible source of funding; in other words, the amount of the collateral that you
furnish determines the extent to which you can utilise the loan. In other words, the loan grows in line
with your financing requirements.
Ø How does a borrowing base work?
First of all, we agree a credit line with you. This represents the theoretical upper limit of the amount
that you can utilise. The extent to which you are permitted to actually utilise this line depends on the
amount of collateral that you or a third party can furnish.
Ø Advantages of a borrowing base over traditional financing models:
- Continuity: As a credit line that moves parallel to your financing requirements, a borrowing base
facility safeguards your company’s long-term liquidity. For instance, the value of your collateral rises
automatically whenever price increases result in higher financing requirements, since the collateral is
valued on the basis of the higher market prices.
- Stability: This financing concept provides you with a stable source of funding at stable conditions,
regardless of trends in the broader economy. Your utilisations are based primarily on the value of the
collateral you furnish.
- Costs: Borrowing base loans are considerably less expensive than traditional operating loan facilities.
One of the main reasons for this is the fact that the 100 % collateral cover and the close cooperation
between the bank and the customer improves the bank’s internal rating, and thus the interest rate
margin.
- Prospects: Borrowing base facilities are an ideal preliminary step for further asset-based lending
models such as factoring or asset-backed securitisation. The regular reports enable your financial
accounting system to gradually develop the comprehensive set of data required to move on to these
products in the medium term.
Ø Is a borrowing base loan the right facility for my company?
A borrowing base loan can be arranged as long as your company’s current assets (accounts receivable and
goods) are sufficient to secure the desired financing volume. BHF-BANK prefers goods that are
commodities or commodities-related products.
Ø What types of collateral can be furnished for borrowing base facilities?
As a rule, current assets such as raw materials, auxiliary materials and supplies, commodities-related semifinished or finished products can serve as collateral, as can accounts receivable. The bank then makes
certain deductions to determine the borrowing base, i.e. the basis for the fully secured loan that can
actually be utilised by the customer. In the event that you are already financing your accounts receivable
using other models (e.g. ABS, factoring), we can also set up a borrowing base facility based solely on
your stock on hand so that it runs alongside the existing financing models.
Ø How is the collateral value calculated?
The net value of the accounts receivable (accounts receivable less deductions) plus the net value of the
goods (goods less deductions) represents the total collateral, and thus the amount of the highest
possible utilisation under the agreed loan facility. In addition, cash held on accounts pledged to the
bank can also serve as collateral as part of a borrowing base facility. This increases your possible
utilisations within the agreed credit line. The calculation method and the necessary deductions are set
out in the loan agreement and can be adjusted by mutual consent. The amount of the available
collateral is reported to us at regular intervals. The reporting intervals (usually every 14 days) depend
BHF-BANK
1
on your company’s particular situation and are set out in the loan agreement.
Ø What deductions are made on accounts receivable?
- Deductions are mainly made in respect of accounts receivable that are overdue or doubtful, or which
can be contested.
- A pro rata deduction is then made on the remaining amount of the accounts receivable so as to take
account of general liquidation risks and cost contributions pursuant to the new German Insolvency
Act. You can influence the amount deducted by diversifying your accounts receivable and by
employing a high-quality risk management system.
- The amount remaining following these deductions is the net value of the accounts receivable for
borrowing base purposes.
Ø What deductions are made on goods?
- Goods are valued at their current prices. Deductions are largely made in respect of trade payables, for
instance, if the goods furnished as collateral are subject to any reservation of title.
- A pro rata deduction is then made on the remaining amount of the goods so as to take account of
general liquidation risks and cost contributions pursuant to the new German Insolvency Act. The
amount deducted for general liquidation risks can vary depending on the type of goods involved.
- The amount remaining following these deductions is the net value of the goods for borrowing base
purposes.
Ø What data do I need to deliver to BHF-BANK?
You agree to inform us of your portfolios of accounts receivable and stock on hand at the agreed
intervals (usually every 14 days). In order to reduce your workload to a minimum, particularly in the
early stages of a borrowing base facility, our staff will show you a simple and convenient method for
generating the necessary data from your account system. These steps are easily integrated into your
work routine. Using this data, we then draw up a borrowing base report that evaluates the information
provided so as to determine the total collateral value. This value represents the upper limit for your
utilisation of the borrowing base facility until the next borrowing base report is drawn up.
Ø How does BHF-BANK process this data?
The data you provide is processed using a specially designed application. In other words, the
programme takes the parameters agreed upon with each individual customer, calculates the agreed
deductions and determines the net collateral value and the permissible utilisations. Each borrowing
base report (“BBR”) represents a snap shot of the value of your current assets. The BBRs are drawn up
at regular intervals, giving you an overview of the change in value of your current assets. At the same
time, each BBR provides you with a summary of your company’s flows of goods and cash, showing
its liquidity profile in a concise two to three-page document.
Ø How will BHF-BANK cater for my needs?
Apart from drawing up the regular borrowing base reports, BHF-BANK will conduct audits once or
twice a year at your headquarters and the respective warehouses so as to specify the information
contained in the borrowing base report. The bank can thus keep track of developments at your
company and – if deemed necessary – work together with you to adjust the facility to your particular
company’s current needs. Our customers have confirmed that the borrowing base reports and our
audits are very useful from a practical point of view as they can significantly enhance the data in their
finance and accounting departments. Many of our customers believe that our audit and borrowing base
reports provide an important external analysis of their flows of goods and cash, as the reports
consistently reveal areas in which they can optimise their companies’ business operations, both in
economic and legal terms.
BHF-BANK
2
Ø How are borrowing base facilities drawn up?
The planning of a borrowing base facility starts with a period in which the bank and your company get
to know each other. Our aim is to gain sufficient insight into your company so that we can develop a
borrowing base facility that is tailored to your company’s individual needs. To achieve this aim, we
will inspect your main production and warehouse facilities and, together with you, generally define the
assets that will secure your borrowing base loan. Based on the economic and legal due diligence
assessments, we determine which of your current assets could serve as collateral and discuss a number
of possible models with you. In the next step, the collateral structure and the loan agreement are
reconciled with each other. Our staff will then show you a method that enables you to generate the
required data. The borrowing base concept is thus adjusted step by step to your company’s individual
needs and, with your assistance, put into practice.
Ø What contractual arrangements are required?
Depending on the countries in which the goods are stored, or the countries in which third-party debtors
are based, against whom you have a claim that is to serve as collateral, the contractual agreements
must be drawn up in a manner that ensures that the collateral is enforceable in the respective country.
Within the German legal system, BHF-BANK will draw up these agreements itself; for goods stored
abroad, the agreements are developed in close cooperation with experienced foreign lawyers. The
necessary collateral agreements are reconciled very closely with the loan agreement, thus producing a
finely tuned and coordinated set of agreements.
Ø What does a borrowing base loan cost?
Borrowing base loans are considerably less expensive than traditional operating loan facilities as the
100% collateral cover and the close cooperation between the bank and the customer generally improve
your margin.
Borrowing base loans are flexible and multifunctional credit facilities. We would be delighted to
provide you with further information in a personal discussion.
BHF-BANK
3