Borrowing Base
If you are applying for a loan or a line of credit from a bank, the larger your borrowing base, the more money you can get, more or less.
Think about it from the bank's perspective, i.e. put yourself in their black patent leather shoes for a moment. All they care about is that, if something goes wrong, they still get paid. Borrowing base is basically the value of the collateral you are putting up. Or in other words, what the lender will seize if you do not pay the loan back on time. Your Hello Kitty pencil sharpener, while it might hold a lot of personal value, probably won't have high value as collateral.
How the borrowing base is calculated is very...scientific. The lender will come up with a discount factor on your collateral, rather than using what you might feel is the full value.
For example, perhaps you are running a small business, and many customers owe you money, referred to as “accounts receivable.” The bank might discount those receivables by 20-40% if they are less than 90 days old, on the off-chance that a customer might never pay you. The lender might also decide to discount your finished goods inventory by 50% in order to come up with your borrowing base. They will most likely revaluate your collateral on a regular basis in case the value of your receivables, inventory, or equipment goes up or down. They will then adjust the amount of money you can borrow accordingly.
Related or Semi-related Video
Finance: What are Payday Loans?25 Views
finance a la shmoop what are payday loans well this you want to stay away
from payday loans if you are so strapped for cash [girl gives out payday candy bar]
that you need to borrow money to pay the rent and you only have the promise of [hand takes money and leave I.O.U. sticky note]
your future paycheck to borrow against well something has clearly gone wrong [girl looking through papers]
along the way and you shouldn't trust the snazzy-looking television [TV add for loans]
commercials you're seeing out there a payday loan is a loan using the promise
of delivery of cash on your payday cheque as collateral and for most
companies loaning money on payday this is an extremely profitable business
because they quote only charge you 2% unquote for the loan but let's do the
math you're getting the cash two weeks early and last time we looked at a
calendar there were 52 weeks in a year or 26 bimonthly pay periods so if
they're charging you 2% to lend you money for one of those bimonthly pay
periods well their annualized rate that they're charging you for lending you
that money well that's 52 percent a year right 26 times 2% it's 52 percent a year
even the worst credit cards charge dramatically less than this rate of
interest so how do payday loan places get away with such high rent on your
hard-earned money well if you have to borrow money in this form with such
urgency well you're likely a very bad credit [woman sends man out to pay grandma]
risk and the perceived odds of you simply vanishing are well they're high [man gets into car with suitcase]
and the odds you are financially unsophisticated are almost by definition
certain because if you did do the math you get even an expensive credit card to
float you the thousand bucks or whatever your paycheck was or five hundred
dollars for that half month period to just get by until the next month right
so if you ever find yourself needing a payday loan let's hope you can work a
few long weekends saving enough money so that you don't need these things anymore [man working on computer]
and next time well you know what they say stay in school [school kids collaborating on project]
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