An asset-based lender’s field exam is the closest thing in commercial finance to a physical inspection of your working capital. It is not an audit, it is not adversarial by default, and its findings set the advance rates and reserves you will live with until the next one.
What is a field exam?
A field exam is an on-site review, performed by the lender’s exam team or an outside firm, that tests whether the collateral reported on your borrowing base certificate actually exists, is owned free of competing claims, and is collectible or saleable at the values claimed.
It is a verification exercise, not an opinion on your financial statements. Your auditor asks whether the statements are fairly presented. The examiner asks whether the collateral is really there.
When does one happen?
At three points. Before closing, as a condition of the facility. Periodically after that, commonly once or twice a year for a performing borrower. And immediately, on short notice, when something changes: a covenant breach, a sharp move in the borrowing base, or a deterioration in reporting quality.
The frequency is written into the credit agreement, usually with a right to increase it at the lender’s discretion, and at your expense.
What does the examiner actually test?
| Area | Test | What a bad result means |
|---|---|---|
| Receivables existence | Trace invoices to shipping documents and cash receipts | Ineligibles rise, advance rate falls |
| Dilution | Credits, returns, and allowances against sales | A dilution reserve is imposed |
| Ageing accuracy | Recompute the ageing from the ledger | Cross-age rules applied more strictly |
| Concentration | Recalculate by customer | Concentration caps tightened |
| Inventory existence | Physical test counts against the perpetual | Advance rate cut or inventory excluded |
| Inventory costing | Test cost build-up and obsolescence | Reserves for slow-moving stock |
| Payables and priority | Trade payables, taxes, wages, landlord claims | Priority payable reserves |
| Systems and controls | Cut-off, reconciliation, segregation | More frequent reporting |
What is a dilution test and why does it matter so much?
Dilution measures the share of gross sales that never converts to cash for reasons other than credit loss: credit memos, returns, allowances, short payments, rebates, and billing errors.
It matters because the advance rate is derived from it. A book with 3% dilution and a book with 15% dilution are different collateral, regardless of how good the customers are, and the examiner computes the number rather than accepting it. Lenders normally measure it over a rolling twelve months and match credits back to the period of the originating invoice, which produces a higher figure than a simple same-month ratio.
What is a priority payable reserve?
Certain obligations can rank ahead of a lender’s claim on collateral in practice or by law, depending on jurisdiction and circumstances: unpaid payroll taxes, certain employee claims, landlord rights in some states, and unpaid duties or freight on goods in transit. Lenders reserve against them dollar for dollar.
This is why an examiner asks for payroll tax filings and proof of deposit. Arrears there reduce availability directly, and they do it quietly, since the reserve is imposed rather than negotiated.
How should a borrower prepare?
Preparation is mostly the ordinary discipline of a good close, done a week earlier.
- Reconcile the borrowing base to the general ledger for the exam date, and be able to show the bridge.
- Have shipping and proof-of-delivery documents retrievable by invoice number, not by date.
- Run your own ageing and dilution calculation first, so you know the answer before the examiner does.
- Clean up the ledger: unapplied cash, old credit balances, and stale invoices that will not be collected.
- Have payroll tax deposit confirmations to hand.
- Count inventory near the exam date and reconcile the variance.
Nobody is scored on tidiness. But an examiner who finds unreconciled accounts spends the extra days looking for the reason, and the exam bill is yours.
What happens after the exam?
You get a report, usually with recommended advance rates, ineligible categories, and reserves. Those recommendations flow into the borrowing base, and availability can change materially without a single word of the credit agreement being amended.
Ask for the report. Many borrowers never see the document that reset their availability, and the findings are frequently discussible: a definitional disagreement about what counts as a credit memo can be worth several points of advance rate.
Is a field exam a bad sign?
Not on its own. Periodic exams are the ordinary cost of a collateral-based facility and the reason advance rates can be as high as they are. What is a signal is a change in frequency: an unscheduled exam, or a move from annual to quarterly, usually means the file is being watched more closely, which is the early part of the sequence described in loan default: what actually happens.
The short version
The field exam tests whether your collateral is real, owned, and collectible, and its findings set your advance rates and reserves for the following year. Run the dilution and ageing calculations yourself before the examiner arrives, keep payroll taxes current, and always read the report that comes out the other end.