Asset Based Lending Field Examinations
eDelta Consulting has added Field Examinations to its product offerings.
Target markets are the Commercial and Industrial Borrowers (C&I) of commercial banks, credit unions, savings banks, and non-bank asset-based lenders.
Purpose of field exams:
The purpose of Field Examinations is to provide lenders with an independent assessment of the collateral that they are lending against. The examinations generally are conducted on-site at the offices of the borrower or its accountant.
What is a field exam?
A field exam is a process undertaken by a financial institution in order to objectively appraise the value of a firm’s working assets. The goal of the investigation is to determine whether or not accounts receivable and inventory can be converted to cash in order to represent collateral to support an asset-based line of credit.
Why are field exams important?
The asset-based lending structure assumes collateral as the main source of loan repayment and financial strength the second. Traditional commercial loan structures place emphasis first on the financial strength and second on collateral.
Recent developments in field exams
The current method of lending can combine aspects from both lending structures. Where credit is provided with advances against accounts receivable and in some cases inventory, consideration is also given to the company’s capacity to generate cash flow. However, in the current economic environment, many companies have experienced declining sales and profitability, and have had to rely on financing receivables and inventory for working capital purposes.
Benefits to lenders include:
- Verification of the status of the assets held as collateral
- identification of trends in the asset composition,
- examination of risks in the asset/collateral pool
- adequacy of internal controls of the borrower’s accounting procedures
- An on-site view of the borrower’s financial situation
- Ongoing monitoring of the collateral supporting the borrowing arrangement
- Suggestions to both the lender and the borrower for improvement of the borrower’s financial management
As a summary of the benefits, a well-executed field exam will identify risks and patterns of declining credit situations. An established field tester will provide valuable insights into the borrower’s financial condition along with recommendations to lenders.
Likely candidates for Field Exams include:
- Prospective new borrowers
- Borrowers whose financial condition is deteriorating or where there are delays in loan repayments
- Annual credit renewals or requests for increases in a loan relationship
- Recurring examinations
- Relationships where there is doubt or concern about the ability of borrower management
- Concerns about the accuracy or timeliness of financial statements and/or financial reporting
- Companies with unusual corporate or organization structures
eDelta Field exam procedures
A dialogue is held with the lender before the start of the examination to determine specific concerns about the borrower and to outline the procedures and tests that will be used by the on-site consultant.
The on-site consultant begins a detailed analysis of a company’s financial statements, specifically: accounts receivable, inventory, cash (including bank reconcilements), accounts payable, and customer records. Once the primary sources of risk are recognized, an examination is planned to establish these risks. Other areas tested include internal controls, systems, other liabilities, and insurance. Examiners will look at any other items of concern to the lender.
When examining accounts receivable procedures, identifying ineligible and testing for dilution are required practices. Frequently seen ineligible include: receivables more than 90 days past the invoice date, overseas and government receivables, contras, retainers, and cross-age receivables.
Contra accounts appear on the balance sheet and offset the balance of a related/corresponding account.
Cross-age receivables are accounts, which are deemed uncollectable because a stated percentage of the receivables in that specific account is overdue. [Note: the higher the risk, the lower the cross-age percentage].
Dilution of a receivable occurs when there is a reduction in the amount to be collected and converted to cash.
A typical field exam analyzes changes in important ratios from period to period. Unexplained changes in these ratios could mean unstable financial operations or inconsistent accounting practices.
A field exam regarding a firm’s inventory begins with gaining an understanding of the manufacturing process, starting with raw materials and ending with the finished product. The field examiner conducts a physical inventory of goods and identifies ineligible. Examples of inventory ineligible include: work in process, packaging materials, inventory on consignment, inventory in transit, licensed products, and general ledger reserves.
Why utilize eDelta Consulting:
- eDelta meets with lenders prior to the exam to verify concerns/expectations and to outline procedures to be used
- eDelta will customize each review to the specific requirements of the client
- eDelta’s IT expertise can lead to automation of parts of the examination
- eDelta’s field examiners will have experience with projects of this kin
eDelta’s twelve years of consulting experience and its registered PCAOB Accounting Firm, eDelta Consulting Services, assures the clients that there will be a strong level of oversight of the consultants in the field.