August 1, 2023

What Advance Rate Applies to Cash?

Kyle Meade
What Advance Rate Applies to Cash?

One of the most heated discussions that play out in negotiating borrowing base calculations is whether or not cash should be added to the eligible pool balance (and thus multiplied by the advance rate) or whether it should be added after the eligible pool balance has been multiplied by the advance rate (giving it 100% value).

Different Views

Multiply Cash by the Advance Rate

One side of the argument believes that cash should be multiplied by the advance rate because cash does not earn interest, whereas the underlying loans of the eligible pool balance do generate interest.  This stems from the fact that the eligible pool balance is based on the outstanding principal balance.  Meaning the expected cash flows generated from the non-principal payments are not part of the calculation and represent an additional buffer for the investor in the case of a wind-down,  whereas cash does not provide any additional buffer for the investor.

Multiply Cash by 100%

The other side of the argument believes that cash should be multiplied by 100% because it can be liquidated immediately to pay down the principal balance.  This side of the argument will also point out that multiplying by 100% doesn't put any unnecessary pressure on the borrower to originate new assets that might be riskier. This is because when multiplying by the advance rate, the borrower could decide to cure a borrowing base deficiency by originating new loans regardless of risk since even risky new loans are worth more than cash, which is ultimately harmful.

Additional parameters

Some lenders will fall in between the two camps by adding additional terms to how the cash can be used.  Such terms include:

  • The maximum amount of time cash can be used in the borrowing base. Essentially creating a term that limits cash can only be used for a certain number of days in a month or some other time period.
  • The maximum amount of a borrowing base that can be calculated with cash, such as a maximum of 5% of the borrowing base can be based on cash.

How can Cascade help?

Regardless of how the negotiations are settled between the borrower and lender, Cascade can support any variation of the borrowing base calculation.  We've had experience with lots of different flavors of how cash is used and are happy to work with any form of the borrowing base calculation that both parties agree with.

Want to learn more about our software? Schedule a demo with our team today.