Success of a Borrowing Base Tiering Strategy

Introduction:

Many times working capital strategies for bank clients are centered on lines of credit structured to a borrowing base. Often, the borrowing base is weighted towards the accounts receivable portion of the portfolio. The eRevenue® web-based software platform allows the bank to configure the borrowing base in some unique and important ways. Essentially, a bank is able to do what is called a "risk-indexed borrowing base structure".

Most clients have credit policies that are loose, vague, or sometimes even non-existent. This may result in several different types of invoice term strategies within an accounts receivable portfolio. To compensate for this, most banks set a standard borrowing base rule that any accounts receivable over 90 days from the date of the invoice become ineligible from the borrowing base. This, however, may not fit with the credit terms being offered by the client and/or the credit quality of that client's customer. This is where a "risk-indexed borrowing base structure" comes into play.

The eRevenue® web-based software platform and system allows the bank to set up a credit scoring matrix for each of their client’s customers. Each client’s customer is scored using a customized credit algorithm. Based on the credit score, an appropriate funding level for that customer within the borrowing base is established as well as concentration levels for that customer within the borrowing base. Essentially, the borrowing base can then be set to reflect these customer concentrations and/or credit limits. As invoices are submitted from the bank's client directly into the eRevenue® system, the appropriate business rules set for that customer come into play, establishing their proper weight in the borrowing base. Then, eRevenue® goes one step further. It allows the bank to set multiple borrowing base percentages based upon the time that the receivable is out. This is illustrated as follows:

(For privacy purposes, the name of the lender and their client has been changed).

Real-life Application:

Shiloah National Bank set business rules in the system to accommodate the business practices of Casey Metals, one of their largest clients. These rules were set up as follows:


Additionally, the bank wanted customer concentration rules set to this tiering structure which allowed the borrowing base integrity to be maintained keeping it completely within the risk profiles established by the bank’s credit policies.

Since that structure worked so well for the customer mentioned above, Shiloah National Bank now customizes every client that is setup in their eRevenue® system based on their individual business practices.

Win – Win:

This risk based borrowing base tiering strategy allows a nice "yellow" zone to protect the borrowing base from becoming upside-down if a large block of receivables should suddenly and simultaneously hit 90 days outstanding. This essentially stops the cliff effect that can occur when a large block of receivables hits the 90 day chargeback point.


This strategy also works with cross-agings of the accounts receivable. When x percentage of a client's invoices to a specific customer gets over a certain length of time outstanding in conjunction with the entire percentage of borrowing base receivables, tiering can be established to reduce that customer's percentage involvement in the portfolio as a whole.

The key is for the bank to have business rules set for the borrowing base pertinent to each client’s individual customer. If the bank utilizes the features in the eRevenue® system to properly set these credit rules, even if client credit policies are loose, vague, or non-existent, the bank will effectively mitigate risk in the borrowing base.

The client wins as well since they are able to keep individual customer terms and feel that the bank is working within their business structure. The client is never in the dark. They always have a clear understanding of the structure of the borrowing base of the receivables submitted, thus they can, in turn, establish credit policies that would comply with the bank’s assessment regarding the overall risk of their customers.