A well-managed borrowing base is essential for accurate lending decisions, yet common errors can lead to financial inefficiencies, compliance risks, and strained lender relationships. Here are some frequent borrowing base mistakes and practical strategies to avoid them.

1. Missing Steps in Calculations

Loan agreements often contain legal text that spans multiple sections, making it challenging to translate into manual calculations. Critical elements such as eligibility, excess concentration, and varying advance rates can be overlooked. This leads to miscalculations that distort the borrowing base and can result in unintended funding shortfalls.

How to Avoid It:

• Implement a structured process for interpreting legal agreements, ensuring all relevant provisions are captured.
• Use a checklist to verify each step in the borrowing base calculation.
• Automate the translation of legal text into calculation logic where possible to minimize human error.

For insights on accurately drafting mathematical formulas in lending agreements, refer to our blog on The Art of Drafting Mathematical Formulas in Asset-Backed Lending Agreements.

2. Overly Complex Excel Files

While spreadsheets are a staple in financial management, excessively large and intricate Excel files can make it difficult to audit, troubleshoot, and validate errors. Complex formulas and links across multiple sheets increase the risk of miscalculations and make it harder for new team members to understand the structure.

How to Avoid It:

• Keep spreadsheet models as simple and transparent as possible.
• Use clear labeling and document the logic behind calculations.

·   Leverage financial software with built-in borrowing base management tools to reduce reliance on manual spreadsheets.

Discover how Cascade's platform can assist in structuring deals efficiently in our Structuring Deals with Confidence feature overview.

3. Failing to Monitor Springing Triggers

Certain loan agreements include springing triggers that require adjustments to borrowing base calculations when specific conditions occur, such as breaching performance ratios. Since these conditions are event-driven, they can be difficult to hardcode into standard spreadsheets.

How to Avoid It:

• Set up automated alerts for trigger events to ensure timely adjustments.
• Incorporate conditional logic within models to accommodate changes dynamically.
• Regularly review borrowing base calculations to confirm they reflect current performance conditions.

Learn about the importance of daily calculations in risk monitoring in our blog on The Importance of Daily Calculation in Risk Monitoring and Borrowing Base.

4. Improper Service Report Data

A common issue in service reports is the inclusion of transactions that do not align with the proper cutoff date. Service reports are typically generated using a historical cutoff date (e.g., a report created on March 4 for data as of February 28). However, errors arise when data queries pull transactions as of the current date instead of the cutoff date. Additionally, ACH and other processing delays can cause payments to be misaligned with the correct reporting period. This means payments made on February 27 might not be included until the March 30 report, creating discrepancies in borrowing base calculations.

How to Avoid It:

• Always query data using the correct cutoff date rather than the current date to avoid including future-dated transactions in service reports.
• Implement reconciliation checks to capture payments that were made on or before the cutoff date but not yet processed due to timing issues (e.g., ACH delays).
• Use technology to automate data pulls based on historical cutoff dates and reduce reporting errors caused by timing mismatches.

5. Mismanaging Excess Concentration

Excess concentration needs to be carefully managed to avoid unnecessary reductions in the borrowing base. Double counting loans or failing to properly allocate concentration limits can lead to an understated borrowing base, restricting available credit unnecessarily.

How to Avoid It:

• Implement automated checks to flag potential double counting.
• Develop a structured method for prioritizing excess concentration calculations.
• Conduct periodic audits to ensure concentration limits are correctly applied and adhered to.

Understand how eligible pool balance affects your borrowing base in our article on Eligible Pool Balance: What It Is and How It Affects Your Borrowing Base.

Final Thoughts

Avoiding these common borrowing base mistakes requires a combination of diligence, automation, and structured processes. By implementing best practices, borrowers can enhance accuracy, reduce errors, and maintain strong relationships with lenders. Investing in robust systems and regular audits can go a long way in ensuring an efficient and compliant borrowing base management process.

For a foundational understanding of how borrowing bases work, including their components and calculations, check out our Comprehensive Guide to the Borrowing Base.

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