Borrowing Base Facilities for Physical Commodity Traders

Imagine you trade crude oil or grain and face sudden margin calls when prices swing. How do you free up cash without selling inventory at a loss? A borrowing base facility could be the solution. It lets you borrow against eligible inventory and receivables, adjusting your line as your collateral moves. But what exactly goes into structuring one and is it right for your business?

How a Borrowing Base Facility Works

A borrowing base sets a maximum credit line equal to a percentage of your approved assets. For example, a lender may advance up to 70 percent of the net realizable value of crude oil stock and 80 percent of confirmed export receivables. As you purchase, sell or invoice, your available borrowing capacity rises and falls—offering flexible liquidity tied directly to your trading cycle.

Key Components and Example

• Eligible Collateral: Crude, refined products or metals stored in approved warehouses under surveyor oversight.
• Advance Rates: Typical ranges from 50 to 80 percent, depending on commodity type and quality.
• Pricing: Interest plus facility fees, surveyor costs and collateral management charges.
• Covenants: Minimum asset values, maximum concentrations and reporting schedules.

For instance, Trader A holds 10,000 barrels of Bonny Light crude valued at $60 per barrel. At a 70 percent advance rate, the facility would permit a draw of $420,000. After selling half the barrels, the borrowing base adjusts downward to match the remaining stock.

Benefits for Commodity Traders

• Access working capital tied to actual inventory and receivables.
• Manage price volatility without forced liquidations.
• Preserve equity and existing credit lines for other uses.
• Scale financing up or down as your portfolio changes.

Common Pitfalls and How to Avoid Them

• Overconcentration: Relying on a single commodity can trigger collateral warnings if that market dips.
• Inspection Delays: Late warehouse or surveyor reports can constrain borrowing unexpectedly.
• Complex Covenants: Strict reporting and value thresholds require robust back-office systems.

Is This Right for You?

Ask yourself: do I need revolving liquidity that follows my trading volumes? Can I commit to monthly reporting and physical collateral inspections? If yes, a borrowing base facility may offer the flexibility and cost efficiency to grow your trading business without losing control of your assets.