Borrowing bases
Borrowing base structures allow banks to finance against an aggregated pool of working capital assets (typically inventory, receivables) that are given as collateral. The assets are valued on a periodic basis (weekly, fortnightly, monthly) at an agreed percentage/advance margin that takes into consideration the liquidity and the quality of the underlying assets. This value then serves as the maximum limit for drawings under the facility.
Pros and cons of financing on a borrowing base basis
Such facilities are less laborious relative to transactional trade finance, but require that the financier be comfortable with the reporting capabilities of the borrower. Typically, there will be covenants which enable the financier to conduct independent checks on the assets reported.
For example the requirement for an independent audit to be performed at the option of the bank, or to perform verifications with the warehouse (in the case of inventory), or the buyers (in the case of receivables). The more frequent, and the more intense the checks, the greater the reliability of the base, but this increases the labour intensity and costs for the bank.
As the borrowing bases are reported on a historical basis, the commodity trader might find it difficult to operate in times of fast rising commodity prices, as there will be a lag in the reporting
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