A distributor asks for a working capital line against its receivables and inventory. Compute the borrowing base, the amount it can still draw, and what would shrink the base.

The borrowing base is Rs 117 crore: Rs 72 crore against receivables (120 x 80% eligible x 75%) plus Rs 45 crore against inventory (90 x 50%), and with Rs 30 crore drawn Tejomay can draw Rs 87 crore more today. The base is recalculated from each month's figures, so it shrinks when receivables age past 90 days, a customer disputes invoices or grows past the concentration cap, inventory becomes slow-moving, or sales simply fall; if eligibility slips to 70% and the inventory advance to 40%, the base drops to Rs 99 crore.

A pawnbroker does not lend the full value of a watch; he first decides whether it is a watch he can sell at all, then lends a fraction of what it would fetch. An asset-based line works the same way: the bank first decides which receivables are eligible, then advances a percentage of those, and the total across receivables and inventory is the borrowing base, the most it will lend at that moment. Tejomay's Rs 120 crore of receivables becomes Rs 96 crore after eligibility and Rs 72 crore after the 75% advance; its Rs 90 crore of inventory becomes Rs 45 crore at 50%. The base is Rs 117 crore, and because Rs 30 crore is drawn, availabilityThe borrowing base less what is already drawn: the amount a borrower can still take from an asset-based line today. is Rs 87 crore.

The rate reflects how surely the bank gets its money back if Tejomay fails. A good invoice turns into cash within weeks whoever owns it, so it earns 75%; packaged food inventory has to be sold, possibly at a discount and before it expires, so it earns 50%; and the same logic takes an invoice out of the pool entirely once it is over 90 days old, disputed, owed by a related party, or part of a customer balance above the concentration cap. Those exclusions are the 20% Tejomay loses before the advance rate is even applied, and they are the part of the base that moves most from month to month. A bank will also apply a dilution reserve for the returns and credit notes that mean an invoice is never paid in full, and a concentration cap so that one retailer's failure cannot take a quarter of the collateral with it.

Run next month's figures. If slower collections push eligibility to 70% and a build-up of slow-moving stock cuts the inventory advance to 40%, the base falls to Rs 99 crore and availability to Rs 69 crore, with nothing else about the business having changed. Falling sales shrink it too, because fewer invoices means fewer eligible receivables; a seasonal distributor sees its base rise before the festival season and fall after. The danger is an overadvanceThe position where the amount drawn on an asset-based line exceeds the borrowing base; the borrower must repay the excess, usually within days.: had Tejomay drawn Rs 100 crore and the base then fallen to Rs 99 crore, it would owe the Rs 1 crore excess immediately, precisely when its collections are slow. That is why a borrowing base certificate is submitted monthly, or weekly when the bank is nervous, and why the company's own cash forecast must track the base rather than the headline facility size.

Close with what you would tell Tejomay. The line gives Rs 87 crore today, but it is a line that breathes with the business, and management should run it with headroom of at least 15% of the base rather than drawing to the limit. The limit of the exercise: eligibility and advance rates are the bank's choices, set in the facility agreement and tightened in a field exam, so the real base is whatever the bank's auditors find when they visit the warehouse and the receivables ledger.