What is a field exam, and how do I prepare for one?

What the examiner is actually checking

Underwriting asks whether your business is worth lending to. A field exam asks a narrower question: is the collateral you report the collateral you have, and would it turn into cash if the lender had to collect it? An asset-based line lends against your receivables and inventory month by month, on the strength of a borrowing base certificate you sign. The exam is how the lender decides how far to trust that signature.

It is not an audit, which gives an opinion on your statements as a whole; the examiner cares about a few balance sheet lines and tests them invoice by invoice and payment by payment. Nor is it an appraisal, which values inventory in a liquidation; the exam checks that the stock and its records exist and agree.

The first exam happens before closing, partly at your premises and partly from files you share. After closing, the loan agreement sets how often the lender may repeat it at your expense, and that frequency usually rises when excess availability falls or a default occurs. For the short definition, see the glossary entry on the field exam.

The tests, one by one

The last test is the one the others feed. The examiner produces its own borrowing base for a recent month and compares it with the one you reported. The difference, and the reasons for it, are the headline of the report. A small, explained difference is normal. A large one, or one nobody at the company can explain, changes how the lender reads everything else you send.

What the exam fee covers

The borrower pays for field exams in almost every asset-based agreement. The charge covers the examiner's time, on site and remote, the time to write the report, and travel and out-of-pocket costs. Some lenders use their own examination staff and charge a set rate per examiner day; others hire outside firms and pass the invoice through. The pre-closing exam is usually payable whether or not the loan closes, often from a deposit taken when the term sheet is signed.

What drives the cost is scope: locations, customers and invoices, whether inventory is in the base, how many systems the numbers pass through, and how long it takes the examiner to get answers.

Three things are worth settling at the term sheet stage: how many exams a year the lender may charge you for in the normal course, whether there is a cap on exam and appraisal costs while no default exists, and how the frequency changes if availability runs low. Those terms sit alongside pricing, and like the unused line fee they are part of what the line really costs.

Where the surprises come from

Owners worry that the examiner will find something wrong with the business. Much more often it finds something wrong with the reporting. The usual culprits are ordinary bookkeeping habits that nobody had a reason to fix until a lender started relying on them:

• Customer payments received in the last days of the month and parked unapplied, so the aging overstates what is owed
• Credit memos posted to a returns or discounts account instead of against the customer's balance, so the aging never shows them
• Month-end journal entries to receivables, such as accrued unbilled revenue, that appear in the ledger but not in the aging
• Bank deposits that include owner loans, asset sales or transfers between accounts, which make collections look larger than they are
• Inventory counted once a year and carried at standard costs that have not been updated
• Invoices issued when an order is booked rather than when it ships, a practice some industries treat as normal and asset-based lenders treat as ineligible

Here is how one of these plays out. A company reports receivables of 4,200 on its aging. The ledger shows 4,050. The examiner finds 90 of credit memos that were never applied to customer balances and 60 of cash sitting unapplied. It takes receivables down to the ledger figure, counts the unapplied credits as dilution, and notes that the company could not explain the gap itself. The lender had discussed an advance rate at the top of the typical 80% to 90% range; it closes lower, with a dilution reserve and weekly certificates until the next exam. None of that reflects a weak business. All of it reflects an aging nobody had tied to the ledger.

Examiners price what they find and what you could not explain. The same gap costs far less when your own reconciliation already names it.

How to prepare: run the exam on yourself first

The best preparation is to do the examiner's work before the examiner arrives. None of it requires outside help; all of it requires someone who knows the books to set aside the time.

• Tie the aging to the ledger at each of the last several month-ends, and write down every reconciling item with its reason
• Clear unapplied cash and open credits by applying them to the invoices they belong to
• Reconcile deposits to collections: bank deposits against cash posted to receivables, with every non-customer deposit identified
• Pull your own invoice sample and confirm each has an order and proof of delivery on file, dated before or on the invoice date
• List recent credits by customer and reason, so dilution is explained before it is measured
• Flag the ineligibles you already know about: invoices more than 90 days past invoice, affiliate balances, contra accounts, disputed amounts and balances above the concentration limit
• For inventory, reconcile the last count to the ledger, age the stock by item, and list goods held at leased or third-party sites along with any landlord waivers
• Name one owner for the exam with access to the accounting system, the bank portal and the shipping records

Examiners also test cut-off, whether sales and credits land in the right month, so look at the invoices and credits either side of the last two month-ends. If you already know your aging has a weakness, see what lenders look for in an AR aging and deal with it before the exam, not during it.

After the exam: how findings become terms

The report goes to the lender's credit team, and its findings flow into the loan agreement: the definitions of eligible receivables and inventory, the advance rates, the reserves and the reporting schedule. The pattern is predictable.

Periodic exams after closing work the same way, in both directions. A run of clean exams is the strongest argument you have for removing a reserve, raising an advance rate or reducing exam frequency at renewal. A poor one after closing can shrink availability in the middle of a season, which is why the monthly reconciliation discipline matters after the first exam as much as before it.

What to have ready, and where Transparent fits

For a line of credit or asset-based facility, Transparent's own checklist asks for:

• AR aging, by customer, with days outstanding
• AP aging
• Balance sheet
• P&L / income statement
• Year-to-date P&L through last month-end (optional)
• Debt schedule and UCC position, showing existing liens
• Inventory report, if inventory is part of the borrowing base (optional)
• Bank statements (optional)
• Business tax returns, 2–3 years (optional)

Those are, not by accident, the documents an examiner starts from. Because the aging and the balance sheet arrive together, a gap between them is visible when the file is first assembled rather than later, in an exam report. Once the documents are in, Transparent builds the full lender package, a financing model, lender presentation, blind teaser and underwriting memo, in a day; see the package for what it contains.

Of the 1,800+ lenders in Transparent's book, 235 write asset-based loans and lines. They differ in how they scope exams, how often they repeat them and what they charge, and in how they translate findings into advance rates. Those differences are worth comparing alongside price, particularly between bank and non-bank asset-based lenders.