The length of the collateral field examination depends greatly upon the scope, nature of business and magnitude of turnover involved. Each situation varies depending upon the size, volume and track record of past and present business activities, location of customer, accuracy of records, availability of data in electronic form, number of divisions involved and responsiveness of the borrower. Detailed test programs are designed for each assignment.
ARIZ will provide a list of required materials to the borrower ahead of the field examination to enable them to be prepared in advance and to assist in controlling the cost of the field examination. The borrower can also help to facilitate the examination by providing information electronically.
While audited financial statements can be an important information source, they are not designed to provide detailed insight into the collateral quality or liquidation values. Audited financial statements provide collateral values at year-end rather than identifying collateral trends throughout the year or up-to-date lendable values such as upward or downward trends. They do not furnish sufficient information to enable the lender to properly assess their client’s credit worthiness. ARIZ can help structure a borrowing certificate, identify categories of ineligible collateral, and establish appropriate advance rates. Our assessment is independent as we are engaged by the lending institution, not the borrower.
The ARIZ staff is uniquely qualified to assess the quality and quantity of the collateral in question. For example, some of the customary information provided during field examinations includes the turnover and dilution of accounts receivables, their concentration and collectability. We assess risk by asking questions like “Are the accounts receivables advance rates appropriate relative to dilution levels? Are invoices being manipulated or rolled to gain availability? Is the bank inadvertently lending on more aging categories than specified in the loan agreement? Is pre-billing or pre-assignment occurring? Is there ‘bill and hold’ or consignment risk? A company may have inventory, but it could be slow-moving, off-site custom made or subject to vendor offset. Furthermore, are inventory advances supported by the quantity physically on-hand and agree with costing records of the borrower?” At ARIZ, we analyze such factors and more. The standard banking principles of ineligible or disqualified collateral are also identified.
Collateral field examinations are beneficial prior to the commitment of new or additional financing and on a recurring basis as warranted. Because the financing or working capital needs of your borrower may change daily, the results of a field examination aid in making informed decisions. These decisions may include increasing a line of credit, disqualifying a portion of the collateral, establishing caps and/or adjusting advance rates. Recurring exams help to keep the lender informed of collateral trends, new ineligible categories, and the accuracy of bank reporting. Field examinations also benefit the borrower, as the results can provide the lender with additional data and analysis necessary to support an increase in additional funds requested and/or improve the borrowing certificate structure.
Field examination fees are usually passed on to the borrower depending on the ending institution. Our rates are highly competitive as our field examination program can be tailored to suit the needs of the engagement. We offer competitive fees for pre-planned and recurring work that enables us to maximize our efficiency in planning and matching staff geography and skills to the job.
The normal scope of collateral field examination includes analysis of cash, accounts receivable, inventory, accounts payable, payroll taxes and insurance. Financial statement and general ledger analysis are also part of the overall scope. Again, these individual areas may include an expanded scope depending on the situation.
From time to time, lenders are asked for a copy of the field examination report by the borrower. Standard industry guidelines do not permit the release of the field examination report, whether the field examination is performed internally by the bank collateral examiners or outsourced to an external field examination service provider. The treatment is like that of a commercial or asset-based lender’s credit facility approval memo which is strictly considered an internal document.This policy is critical to the integrity of the field examination process as well as the maintenance of the field examiner’s independence. However, it is often beneficial for the field examiner and lender to discuss field examination results and subsequent recommendations with the borrower to strengthen any weaknesses observed to improve the structure of the borrowing arrangement.