Borrowing Base Certificate (BBC)
What does it mean
A Borrowing Base Certificate (BBC) is a reporting device where a borrower periodically reports the collateral value that supports a line of credit.
Why does it matter
A line of credit is often collateralized by a lien on assets such as Accounts Receivable and Inventory. When a borrower purchases inventory, they make an advance on their line of credit. The dollars stays on the line of credit when the inventory is sold and an accounts receivable is received. Once the accounts receivable is paid, the borrower uses the cash to pay down the line of credit. What the BBC aims to accomplish is to ensure that the line of credit balance stays in line with it’s corresponding collateral.
When reviewing a BBC, a banker should not only ensure that overall there is sufficient discounted collateral to cover the line of credit balance, but the banker should also pay attention to how the difference between the discounted collateral and loan amount changed since the last time the BBC was submitted. This can be an easy way to spot operating losses early as well as if the borrower uses working capital to purchase long term assets.
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