Field exams and appraisals: who pays, and how often

A field exam is an audit of your collateral and the systems that report it. An appraisal is a valuation of inventory, equipment or real estate by a third party. Both are conditions of an asset-based facility, and both are billed to you.

What a field exam actually looks at

An examiner spends a few days in your office and tests whether the numbers you report can be relied on. That typically means:

• Tying the receivable aging to the general ledger and to the borrowing base certificates you submitted.
• Confirming a sample of invoices against purchase orders, delivery documents and cash receipts.
• Measuring dilution — credit notes, discounts, short payments and returns as a share of sales.
• Reviewing customer concentration and payment patterns.
• Testing inventory counts, costing method and slow-moving stock.
• Reviewing payables for anything past due that suggests a reserve, plus payroll tax and sales tax filings.
• Looking at controls: who can raise a credit note, who applies cash, whether anything is manual.

The examiner is not looking for fraud so much as for the gap between your reporting and reality. What the exam finds drives advance rates and reserves, which is why it deserves preparation.

Who pays and how much

You do. The agreement will say so, usually as a per-diem rate per examiner per day plus travel and out-of-pocket costs, invoiced after the visit or charged directly to the loan. Appraisals are quoted per engagement by an outside firm.

Two things are worth negotiating at closing: an annual cap on the number of exams and total cost while no default exists, and confirmation that the cap comes off only on an event of default or below a stated availability level. Without a cap, the cost of monitoring rises exactly when your ability to absorb it falls.

What it costs, in the shape it is billed

Appraisals are quoted per engagement rather than per diem, and the cost depends on the collateral. Inventory is commonly appraised on a net orderly liquidation value basis, which is a different exercise from an insurance or book valuation and is priced accordingly.

The figure to care about is not the individual invoice. It is the annual total in a bad year: without a cap, a facility under stress can carry quarterly exams and a fresh inventory appraisal in the same twelve months, all charged to a borrower who is already short of cash.

How often

The agreement will state a minimum, commonly once or twice a year for a performing facility, with additional exams at the lender's discretion. Appraisal frequency depends on the collateral: inventory tends to be revalued more often than equipment. Expect more of everything if availability tightens, if dilution rises, or if a certificate cannot be reconciled.

What the findings actually change

An exam is not pass or fail. It produces adjustments, and the adjustments have arithmetic behind them.

The other common outcomes:

• A new reserve. Unpaid rent at a location without a landlord waiver, accrued payroll taxes, an unresolved customer dispute, expected credit notes. Each comes straight off availability.
• A tighter eligibility definition. An aging cut-off moved from 90 days to 60, or a concentration limit lowered, can remove more availability than an advance-rate change does.
• More frequent reporting. Monthly certificates become weekly, which costs staff time rather than money.
• An earlier next exam. The clearest signal that the lender did not like what it saw.

The findings that cause the most trouble

How to prepare

Reconcile the aging to the ledger before the examiner arrives. Have proof of delivery ready for a sample of large invoices. Clear unapplied cash. Know your dilution number before someone else calculates it. Make sure payroll and sales tax filings are current, because unpaid trust-fund taxes generate reserves quickly.

Ask for the report

You paid for it. A copy tells you exactly which findings are behind the next reserve or advance rate change, and gives you something specific to fix before the following visit.

What else to negotiate at closing

The annual cap above is the main one. Three more are worth asking for in the same conversation, and none of them is available on ordinary terms once the facility is live.

• The per-diem rate written into the agreement, rather than left to whatever the exam group charges at the time.
• Notice before an exam, so the people who have to produce the records are not away that week.
• A stated period before an advance-rate change or a new reserve takes effect, so a finding does not become a paydown demand in the same week it is delivered.

The pattern across all of them is the same. Monitoring cost and monitoring consequence both rise exactly when your ability to absorb them falls, and the only moment you can do anything about that is while the lender still wants the deal.