“Well, I guess we have to count it,” the warehouseman grunted as we all eyed a makeshift 5x5 crate built to hold what I could only describe as a lawnmower engine block of some sort. It was item number 135449-1 on my test count list.
The problem this warehouseman had was that he knew, deep down, that they really had no idea how many were in that crate. Whenever they performed the annual count, they just marked “150 units.” That’s what the crate was built to hold, or so they thought. Turns out there was about double that amount piled haphazardly in the bin. “At least we have more than the list says. That’s good, right?”
Well, no, not really. The folks that monitor production and subsequent purchasing all think they have 150 units on hand. If that’s not sufficient to support the production plan, then they’re buying more and more units, which is probably unnecessary. If this same careless approach to the count process is being duplicated in other areas, that is a huge problem for both the bank who is lending on this collateral and for the borrower whose analysis of their own inventory is providing the basis for significant business decisions.
This is a prime example of how a field exam benefits both lenders and borrowers. The field exam is a process used by lenders to ensure their clients’ collateral is sufficient enough to cover potential and actual borrowings. Although the process appears to be beneficial only to the lender, it can provide benefits to both the lender and their clients. In a pseudo-proxy role, the field examiner can provide independent analysis, which can help bridge the gap between lenders and borrowers.
What it means to lenders
Lenders often times do not have the time or personnel to reach out and touch each borrower regularly to analyze the business in detail, thus the examiner should act as the bank’s eyes and ears when completing a new or recurring exam. In addition to the review of borrower’s underlying collateral, the examiner should view and assess management in action and in their element. This interaction should provide insight into the following:
- What is management’s ability to provide accurate data in a timely manner?
- Can management easily compile and justify borrowing-base information?
- Can management readily answer pertinent questions about their business and industry?
What it means to borrowers
Borrowers know their systems intimately but may not be able to communicate the specifics of their systems in the way lenders need to make lending decisions. The field examiner translates the borrowers’ business into a language easily understandable and analyzable by the company’s lender. The field exam:
- Qualitatively and quantitatively demonstrates improvements in sales, business practices, cash collections, etc., which could provide the basis for line increases, advance rate increases, and other more favorable credit terms to help management grow and manage the business more efficiently.
- Takes the borrower’s reporting and puts it into a more uniform format thus streamlining the lending decision process. This is especially true if there are multiple lenders involved.
- Highlights areas where management may not have realized that they had an issue, or there was an issue starting a trend, thus giving management a third-party view of their business, which could help them alleviate issues down the road.
The bottom line
A field exam is an independent analysis. Although the examiner is engaged by the lender, the analysis must be thoughtful, self-directed, and free from bias.
- Lenders want to know the whole story, for better or for worse. The field examiner provides a detailed understanding of the quality and performance of the lender’s underlying collateral, as well as identifies potential liabilities that could impact the ultimate management and collectability of these assets.
- Borrowers want a fair and accurate outcome. The borrowing decision can be a contentious process between management and the lender from the borrower’s perspective. The field examiner’s unbiased analysis can be an effective way to compile neutral data, which can serve as the basis for deciding between opposing views.
The field exam experience is intense. It’s meant to be that way because it is a crucial part of the lending relationship. However, it often is the most effective method for enabling timely, informed discussions between a borrower and the lender. Managed and communicated correctly between the examiner, borrower, and lender, it should provide nuanced advantages for both parties to the transaction.
Kenneth Griffin is a Manager in Moore Colson’s Business Assurance practice and works primarily as a lender services consultant where he manages compliance and due diligence engagements. Bankers and lenders call on Kenneth to assist in conducting business surveys and collateral reviews.