Within the Asset Based Lending (“ABL”) industry a critical piece of the initial and on-going credit review is the field examination (“field exam”). There is a common misconception on the part of business owners that a field exam is equivalent to a Certified Public Accountants (“CPA”) audit. While the two may share similarities, they are actually distinctly different. Perhaps the easiest clarification is that the field exam is primarily focused on the collateral performance, specifically the Accounts Receivable (“A/R”) and Inventory (“INV”), if applicable, rather than the intricacies of the debits and credits surrounding the financial performance and balance sheet, which would be the focus of a CPA audit.
A commercial field exam focuses on a business’ policies and procedures regarding the customers they sell to, their invoicing and collection methodology and trends, their purchasing and payment patterns, how inventory is controlled and priced, the efficiency and timeliness of the books and records, and the overall cash flow of the business. The field exam allows the lender to have a far deeper understanding of how the business actually operates rather than just looking at numbers on a balance sheet or income statement. This allows for more substantive conversations and can often identify areas of improvement that can assist the business in meeting their performance goals.
There have been innumerable instances here at VCF where our field exams have identified areas in which we have made suggestions that resulted in significant improvement to a business’ operations. Business owners are generally focused on their growth and do not always have the time to “get in the weeds” with collection efforts, billing procedures, cleaning up stale inventory, negotiating better vendor prices, and so on. Oftentimes the field exam can identify areas that are not necessarily “broken”, but can certainly be improved upon. In this sense, the field exam can be used as a vehicle for the lender to provide valuable consultation by offering business owners suggestions and observations on their operations.
In addition to conducting field exams on our borrowers, we also offer our services to commercial bankers. Banks are always working with businesses to provide them with necessary lines of credit. As we have stated in previous blogs, business owners should always seek bank financing as their first option since it should be their lowest cost provider. Banks are one of the highest regulated industries and are required to ensure that all loans fall within their credit criteria as dictated by the Office of the Comptroller (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”). The banks may have loans that are balanced on a very thin line between being acceptable or not according to the bank’s specific credit guidelines. By performing a field exam on the businesses that “walk this line”, VCF can provide a credit enhancement for the banker by taking an in-depth look at the borrower’s operations and collateral performance.
A field examination should be viewed as a valuable exercise for both the lender and the business owner. The lender is able to have a fuller understanding of their borrower’s business and the business owner gains powerful insights that can lead to improvements and ultimately, additional growth opportunities.