Everything You Need to Know About Field Examination Services
Lending institutions in the United States know there are inherent risks involved with providing loans to businesses. Borrowers also have to demonstrate that they are reliable enough for the institution to lend them money. They must demonstrate that they can supply collateral to a lender. Collateral is any asset or property that a consumer promises to a lender as backup in exchange for a loan. This can sometimes be hard to demonstrate due to challenges, such as changing accounts receivable balances and inventory valuation, or valuation of the company’s products or services.
In performing due diligence as part of the loan underwriting process, some creditors or lenders may want more specific information in order to decide whether to offer a loan. In order to obtain that additional detail lenders often ask for an independent examination, typically called a field examination by lenders, for new borrowers. Field examinations generally take less time to perform than an audit and are typically less expensive.
Read ahead to learn everything you need to know about field examination services and how CFO Strategies can help provide the information you need to make the best lending decisions.
What Is a Field Examination?
A field examination is an inspection of a borrower’s assets to verify collateral support for a lending institution.
A field examination is different from an audit as audits go into much more detail than collateral field examinations. Audits also require validation of account balances with third parties and take many hours to complete, which racks up their price.
Field examinations are most commonly used in asset-based lending transactions. Creditors often use field examinations to obtain more comfort about the quality and reliability of financial information provided by prospective customers so that they can rely upon the quality and value of the collateral required for the loan.
Field examinations meet lenders’ needs in that it is focused on the collateral, the valuation of the collateral, and processes relating to providing reliable financial information associated with the value of the collateral.
These exams give financial institutions the confidence they need to provide loans and prevent borrowers from misrepresenting their collateral value without gathering unnecessary financial data.
Why Conduct a Field Exam?
The risk for lenders is that collateral may change over time, such as when accounts receivable are used and values change constantly.
Field examinations take the guesswork out of collateral monitoring. These procedures can help identify deteriorating situations in a business’s financial position pre-loan, reducing the risk of misrepresentation.
Recurring field examinations can confirm that a business’s asset value does not decrease over the loan period.
Field exams are essential components of safe asset-based lending. Any institution in the lending industry can benefit from hiring a trustworthy CFO team to perform these services.
Field Examination Procedures
Most field examiners offer several types of field examination procedures as part of their services to suit each lender’s specific needs. A few examples of standard field exam procedures include the following:
Most institutions conduct field examination services to monitor or verify collateral. In these exams, the field examiners evaluate a borrower’s specific collateral values for a secured loan.
Accounts Receivable Balance Verification
Many businesses use their accounts receivable funds as collateral for secured loans. Lenders often limit the loan amount to 70% or 80% of the accounts receivable to control for variation in incoming funds.
Accounts receivable verifications ensure that businesses are properly reporting expected collections and the timing of such collections. In these exams, examiners may evaluate a business’s customer sales, proof of billing, and write-offs of uncollectible receivables to create an accurate valuation of its accounts receivable.
New Business Field Examinations
Financial institutions often require new businesses to undergo field exams before beginning a relationship with the client. These services evaluate specific aspects of the company, such as initial inventory, number of employees, and overall organization size.
New business examinations allow banks to establish a baseline for new clients and gather the information they need to tailor their asset-based lending to the client.
Benefits of Field Examinations
Field examination services provide a range of advantages for asset-based lending, offering benefits to both the lender and the borrower.
Advantages to Lenders
Most banks offer asset-based lending services to help borrowers secure sizable loans. However, if a borrower fails to repay the loan and cannot offer up the stated collateral, the bank can lose a substantial amount of money.
Field examinations allow lenders to gain insight into a client’s accounts, helping lenders feel confident in their lending decisions. If surveyors notice any issues between a business’s stated inventory and the survey findings, the financial institution can alter its lending agreement to reflect the business’s accounting valuation.
Conducting field examinations also provides regulators with more comfort about the quality of the loan underwriting process employed by banks and credit unions. Financial industry regulators react favorably to banks that verify asset-based loans, as these banks are better positioned to limit the number of bad debts.
Finally, field surveys are more affordable than traditional audits. Field examinations only look at specific aspects of a business’s accounting products, reducing the overall fees and offering faster turnaround times.
Advantages to Borrowers
Asset evaluations can help businesses secure larger loans than they could without an exam, as banks will feel more confident lending to these organizations after reviewing their financial position. Examination services can also give borrowers insight into underlying issues they did not notice their business had, saving them time and money down the line.
Contact Our Team to Conduct a Field Exam
Our professionals at CFO Strategies have significant business experience across a variety of fields. We have assisted clients with field examinations, as well as in obtaining new loans and lines of credit. Our team includes professionals with banking and capital markets experience who understand the lending process and evaluate the quality and collectibility of loans.
Our quick turnaround times, modern technology, and knowledgeable team allow our firm to serve our clients well. Call CFO Strategies today to learn more about our field examination services.