What to Do When a Business Outgrows Its Borrowing Base
A business can outgrow its borrowing base long before a competitor attempts to take the relationship.
It happens quietly. Its receivables and inventory support a certain advance rate and, for a while, that is plenty. But then it takes on bigger orders and extends more generous terms to its own customers to win them, which triggers an imminent need for working capital. The collateral formula has not changed, but the business's needs certainly have.
I have held enough of these conversations to know how it usually goes. The lender holds a “good” relationship, albeit one it cannot fully serve, and its options are slim: renegotiate an advance rate that's already thin, watch the business source the capital itself, or refer the business to a new primary lender and hope to stay involved. In practice, that hope rarely pays off. Once a business moves its whole relationship to a new primary lender to solve a problem the original lender could not, that lender typically loses the next deal, any future referral income, and the business's loyalty along with it. A subordinated partner behind the existing senior position is a different thing entirely.
Factors run into a version of the same wall. A business's AR can only support so much of an advance, no matter how reliable the debtor book looks, and a business that has outgrown its facility often has nowhere internal to go for the difference.
This is not a new problem in secured finance. It shows up in every credit cycle. What is worth examining is why more lenders solve it with a subordinated debt piece instead of a referral, and what that arrangement must look like to clear a senior lender's credit committee.
The mechanics that matter
The concept is simple. The execution is where a lot of these arrangements fall apart before they ever get used.
A senior lender's credit committee will decline a request to add something that sits against the same collateral pool its own borrowing base certificate already monitors. If both facilities are drawn against the same receivables and inventory, the senior lender is right to say no, so a piece that gets approved is typically unsecured or tied to a carve-out that the senior lender never accounted for in its advance rate to begin with. The borrowing base calculation does not move.
The intercreditor agreement is the other place these deals live or die, and market convention here is well established: a standstill needs teeth, not just a promise to be reasonable. In a typical structure, the subordinated lender agrees not to take enforcement action for a defined period after any default, and the senior lender keeps the right to block payments to the subordinated lender during that window through a standard payment blockage notice. Senior lenders who have watched a second position lender jump the line during a workout are cautious for good reasons, and that is exactly what a real standstill is built to prevent.
Reporting has to run one direction too. The subordinated lender reads the senior lender's existing borrowing base reports. It does not ask the business for a second set of numbers or trigger a separate field exam. That kind of added friction is usually what kills a deal in committee, regardless of how sound the underlying idea might be.
None of this is exotic. It is the same discipline any experienced ABL shop already applies to a second lien it originates or one it is asked to sign off on. The difference is whether the subordinated lender treats these terms as the starting point of the conversation, or as something to negotiate after the fact.
Fora Financial recently structured a $3 million facility for a California engineering firm expanding into oil field equipment rental, split into two tranches to match the equipment manufacturer's payment schedule, with prepayment eligibility built in once repayment funds arrived from the business's senior lender. The senior lender's position never moved. The business got the capital the opportunity required, structured around its existing capital stack instead of against it.
Timing is not a coincidence
Part of the answer shows up directly in recent deal flow. A business Fora Financial recently financed had a senior line sized at $2 million. The growth that position supported has it headed back to market for a $5 million or larger ABL once it is ready. A live deal working right now looks similar at a larger scale: $8 million in senior debt, growth capital to bridge through the fourth quarter, and a $20 million ABL raise targeted for 2027 once their combined assets support it. Neither business needed a new primary lender to get there. They needed capital sized to where the business actually was, not where the original facility assumed it would stay.
Speed is part of what makes that possible. For a subordinated piece of $1 million or more behind an existing senior position, Fora Financial typically structures and funds it within three to five business days, as fast as two when the situation calls for it.
The lenders handling this well are not the ones with the most working capital products on their rate sheet. They are the ones who treat the borrowing base ceiling as a solvable problem instead of an exit point for the relationship.
If you see a good business outgrow its borrowing base or receivables schedule, that is worth a conversation before the business starts having it with someone else. The borrowing base was never the competitor. What you do next decides whether you keep the relationship or hand it to someone else.
If you would like to discuss more, schedule a meeting with me at forafinancialpartners.com/conf/sfnet.
Since 2008, Fora Financial has distributed $5 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.
