A field exam is an on-site or remote review, by an examiner working for an asset-based lender, of the records behind a borrowing base. The examiner reconciles the receivables aging and inventory reports to the general ledger, tests invoices against shipping records and customer payments, measures dilution, traces cash receipts, and looks for contras, concentrations and aged accounts. One is done before closing and then usually at least annually, more often if availability is tight. The borrower typically pays for it. Findings can add ineligibles or reserves, lower advance rates, or tighten reporting.
- What it is
- The lender's examination of the books and records behind the borrowing base
- What is tested
- Receivables, dilution, cash receipts, inventory records, payables, contras and reporting accuracy
- When
- Before closing, then on a schedule in the agreement, typically at least annually
- Who pays
- Usually the borrower, under the loan agreement's expense provisions
- What findings change
- Eligibility, advance rates, reserves, reporting frequency and sometimes cash control
- Not the same as
- An inventory appraisal, a financial audit or a quality of earnings report
What a field exam is for
An asset-based line is sized off collateral, not off earnings. Each month, or more often, the borrower reports its borrowing base on a borrowing base certificate: gross receivables, the ineligible categories, inventory, reserves and the resulting availability. The lender funds against that certificate. The field exam is how the lender tests whether the collateral reported is the collateral that exists, and whether it would turn into cash the way the advance rates assume.
Asset-based lenders typically advance 80% to 90% of eligible receivables. That leaves a narrow margin for error. If invoices are reported that were never shipped, if customers routinely short-pay, or if collections are slower than the aging suggests, the lender's cushion disappears. A field examiner's job is to find those things before they matter.
Field exams are routine, not a sign of distrust. Bank and non-bank asset-based lenders use them on every facility, and a clean exam is one of the best ways for a borrower to earn a lender's confidence. The exam before closing also often sets the initial eligibility rules and advance rates, so it shapes the facility itself.
What examiners test
The scope depends on the collateral and the industry, but most exams cover the same core areas.
| Area | What the examiner does | What a finding can change |
|---|---|---|
| Receivables aging | Reconciles the aging to the general ledger and to the certificate; reviews aging by customer | Ineligibles; accuracy of reporting |
| Invoice testing | Samples invoices and matches them to purchase orders, proof of delivery and later payment | Whether pre-billing, bill-and-hold or unperformed work is being reported |
| Verifications | Confirms balances directly with a sample of customers, or tests subsequent collections instead | Disputed or overstated balances |
| Dilution | Measures credits, returns, discounts, allowances and write-offs against invoiced sales | Advance rate or a dilution reserve |
| Cash receipts | Traces deposits to customer payments and to the ledger, and tests that collections flow as the agreement requires | Diverted or commingled collections; cash control |
| Contras and affiliates | Matches customer names to vendors and related parties | Contra and affiliate ineligibles |
| Concentration and cross-aging | Identifies large or slow customers and applies the agreement's rules | Concentration excess and cross-aged ineligibles |
| Inventory records | Reconciles perpetual records to the ledger, observes test counts, reviews costing and slow-moving stock | Inventory ineligibles; whether an appraisal is needed |
| Payables and taxes | Reviews the AP aging, payroll and sales tax payments, rent and other priority claims | Reserves for amounts that could rank ahead of the lender |
| Financial reporting | Compares interim statements to tax returns and year-end figures; reviews margins | Covenant inputs and credibility of reporting |
The areas that most often produce findings are dilution, which is often higher than a business realizes once all credits and deductions are counted; contra accounts, where a customer is also a supplier; cross-aging, where one slow customer's whole balance drops out; and concentration limits. Each has its own page.
Inventory is usually handled in two parts. The examiner tests the records: do the perpetual inventory reports tie to the ledger, is the costing consistent, is slow-moving or obsolete stock identified? A separate appraiser estimates the net orderly liquidation value, which drives the inventory advance rate. Inventory typically advances at up to 85% of that value, or roughly half of cost.
How often exams happen, and who pays
The first exam happens before closing, as a condition precedent. After that, the loan agreement sets a schedule. A common structure is at least one exam a year, with more permitted when excess availability falls below a stated level, when the business is underperforming, or when a default exists. Lenders can almost always examine more often at their own expense.
The borrower usually pays. Loan agreements typically make the borrower responsible for the examiner's fees and out-of-pocket costs, sometimes at a stated daily rate, and often cap how many exams a year the borrower pays for while there is no default. Once a default exists, that cap usually falls away. The number of paid exams and any cap on cost are reasonable points to negotiate before signing.
Exams increasingly happen remotely, with the examiner pulling ledgers, agings and bank data electronically and visiting only for inventory counts or where remote testing is not enough. A remote exam is not a lighter one. It needs clean exports and quick answers.
How findings change the borrowing base
The examiner writes a report for the lender's credit team, which decides what to do with it. The possible responses, roughly from least to most serious:
- Reporting corrections. The certificate is recalculated to fix errors, such as an ineligible customer that was being counted.
- New or broader ineligibles. A contra relationship, an affiliate account or a disputed customer is excluded from eligible receivables going forward.
- Reserves. The lender adds an availability reserve for high dilution, unpaid rent, past-due taxes or customer deposits.
- Lower advance rates. If dilution runs well above what the advance rate assumed, the rate itself may be cut.
- Tighter reporting. Monthly certificates become weekly; the lender asks for sales and collection reports between certificates.
- Cash control. In serious cases, the lender moves to full cash dominion, sweeping collections to pay down the line daily.
Any of these reduces availability, sometimes enough to put the line into an overadvance. That is the practical risk of a bad exam: not a lecture, but a smaller borrowing base at a moment the business did not plan for.
A field exam finding does not just correct the past. It changes the formula that sets what you can borrow next month.
A worked example
A distributor reports eligible receivables of 1,000 and draws against them at 85%, for receivables availability of 850. The field exam finds three things: a customer that is also a supplier, owed 40 by the distributor; a large customer whose balance is more than half past 90 days, with 120 outstanding in total, of which only the aged part was excluded; and dilution running above the level the advance rate assumed.
| Step | Before exam | After exam |
|---|---|---|
| Eligible receivables reported | 1,000 | 1,000 |
| Less: contra with customer-supplier | 0 | (40) |
| Less: current invoices of cross-aged customer | 0 | (55) |
| Eligible receivables | 1,000 | 905 |
| Advance rate | 85% | 80% |
| Receivables availability | 850 | 724 |
Nothing about the business changed between the two columns. The exam simply applied the agreement's rules to facts the certificate had not captured. Availability fell by 126, which is exactly the kind of drop that turns a comfortable line into a tight one.
Preparing for an exam
The best preparation is a month-end close that already does what the examiner will do: an AR aging by customer with days outstanding that ties to the general ledger, an AP aging that ties too, credits and returns recorded promptly with a reason, cash applied to specific invoices rather than left unapplied, and a list of customers who are also vendors or affiliates. A business that does those things has little for an examiner to find.
Practical steps before the examiner arrives: gather the last several months of certificates with support; pull proof of delivery for a sample of recent invoices; reconcile inventory records to the ledger; and prepare explanations for anything unusual, such as a large credit memo, a customer on a payment plan, or a sudden jump in a single account. For a fuller checklist, see how to prepare for a field exam and what lenders look for in an AR aging.
The same documents drive the first conversation with an asset-based lender: AR aging by customer, AP aging, balance sheet, P&L and year-to-date P&L, a debt schedule showing existing liens, an inventory report if inventory is in the base, and often bank statements and tax returns. Transparent's book holds 235 lenders that write asset-based loans and lines, bank and non-bank; see which fits. For businesses whose records are not yet ready for an exam-based line, factoring is sometimes the step before.
Common questions
- Is a field exam the same as an audit?
- No. A financial statement audit gives an opinion on the financial statements as a whole. A field exam tests the specific collateral an asset-based lender lends against, and the accuracy of the borrower's reporting on it. Having audited statements does not replace field exams.
- Will the examiner contact my customers?
- Sometimes. Examiners often verify a sample of balances directly with customers, which is usually done in the borrower's name or in a neutral way. Borrowers can ask the lender to test subsequent collections instead for sensitive accounts, and many lenders agree.
- How much does a field exam cost?
- It depends on the size of the business, the number of locations and the scope. The loan agreement usually states whether the borrower pays, any daily rate, and how many exams a year the borrower pays for. Ask for those terms before signing.
- Can a field exam increase my availability?
- It can. An exam that finds dilution lower than assumed, or shows a customer the lender excluded is in fact paying on time, supports a request for a better advance rate or eligibility. Clean exams also support renewals on better terms.
- What happens if the exam finds I have been overreporting?
- The lender recalculates the borrowing base. If the line is overadvanced, the excess usually must be repaid promptly. Deliberate misreporting is a default and, under a validity guarantee, can expose the owner personally.