A field exam in asset-based lending is an on-site audit of the collateral backing your credit facility, conducted to verify that the accounts receivable, inventory, and other assets you’ve pledged actually exist, are worth what your books say, and could be liquidated if you defaulted. The lender hires an independent examiner or uses internal audit staff to review your collateral records, test your internal controls, and translate your gross asset balances into the “eligible” numbers the lender will actually lend against. The results feed straight into your borrowing base and determine how much credit you can draw.
Why Lenders Require Them
Asset-based loans are structured around collateral value rather than cash flow or creditworthiness alone. The lender’s risk depends almost entirely on whether your receivables and inventory are real, collectible, and accessible. Financial statements give a high-level view but won’t reveal aging disputes buried in a receivable ledger or obsolete inventory in a back warehouse. A field exam closes that gap.
The OCC’s guidance is direct: a field audit should be conducted before a new account is booked and regularly thereafter, often quarterly, with greater frequency when risk warrants it. In workout situations or high-risk relationships, weekly or even daily audits can be appropriate.1Office of the Comptroller of the Currency. Asset-Based Lending – Comptroller’s Handbook The initial pre-closing exam is foundational. It sets your advance rates, identifies the reserves the lender will impose, and shapes the whole loan structure. Every recurring exam after that monitors whether the collateral picture has shifted.
Frequency scales with risk. A stable borrower with clean books might see quarterly visits. A company experiencing rapid growth, margin compression, or customer concentration issues will see them more often. Lenders that stretch audit cycles draw regulatory scrutiny, so expect the schedule to hold.
What Examiners Test in Accounts Receivable
Receivables testing is where field examiners spend the bulk of their time. A/R is the most liquid collateral in a typical ABL facility and the most susceptible to quality erosion. The examiner’s job is to convert your gross receivable balance into an eligible number the lender can lend against.
Aging and Confirmations
The examiner starts with your A/R aging report, reconciles it to the general ledger, and flags invoices past the maximum age allowed under your loan agreement. Then the examiner contacts a sample of your customers directly to confirm that the amounts on your books match what those customers believe they owe. Discrepancies trigger deeper testing.
Ineligible Receivables
Not every receivable counts toward your borrowing base. Categories that lenders routinely exclude include:
- Past-due receivables that have been outstanding long enough to call collectability into question.
- Concentrated accounts. Single customers representing 10 percent or more of total receivables are typically capped at 10 to 20 percent of the borrowing base.1Office of the Comptroller of the Currency. Asset-Based Lending – Comptroller’s Handbook
- Cross-aged accounts. When any percentage of a customer’s receivables becomes ineligible, most loan agreements designate all of that customer’s receivables as ineligible.
- Affiliate receivables, which can deteriorate simultaneously and carry elevated fraud risk.
- Government receivables, where liberal return rights and extended payment terms raise risk unless the borrower can show an acceptable payment pattern.
- Foreign receivables, where legal, currency, and country risks can disrupt payment. Lenders that allow these often require a letter of credit or insurance.
- Contra accounts. When you both buy from and sell to the same customer, that customer can offset what they owe you against what you owe them.
- Unbilled receivables, meaning revenue recognized but not yet invoiced.
This is where borrowers get surprised. You might have $5 million in gross receivables on your books, but after stripping out concentrated, cross-aged, and past-due accounts, the eligible pool can be materially smaller.
Dilution Reserve
The examiner also calculates a dilution reserve, which accounts for non-cash reductions to your receivable balance like returns, allowances, disputes, and bad debts. Dilution is usually 5 percent or less of receivables, though the percentage varies by industry.2Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing – Comptroller’s Handbook A rising dilution rate is a warning sign because it can signal deteriorating product quality or customer satisfaction problems. Examiners review and test selected credit memos to verify that reported dilution matches reality.
What Examiners Test in Inventory
Inventory is harder to liquidate than receivables, and the field exam reflects that skepticism. The examiner is trying to determine a realistic recovery value, not just confirm what’s on your perpetual inventory report.
Physical Verification
Examiners compare perpetual inventory records against physical count procedures to test the integrity of your inventory system. They count a sample of high-value items and trace them back to the records. Location matters too. Inventory held at third-party warehouses without proper documentation creates risk that the lender’s security interest may not hold up, so the examiner confirms where everything sits.
Valuation and Obsolescence
The examiner checks your valuation method (FIFO or LIFO) and verifies consistency with prior periods. Cost components are scrutinized to confirm inventory is valued at direct materials, labor, and applicable overhead without inflated allocations. Obsolete, slow-moving, or damaged goods get excluded or heavily discounted. Borrowers in fashion-sensitive or technology industries face extra scrutiny because obsolescence can accelerate fast.
What the lender ultimately cares about is net orderly liquidation value: what the inventory would sell for in a structured sale with a reasonable marketing period, minus the costs of dismantling, shipping, storage, and broker commissions. That number is almost always well below book value, and the gap can be eye-opening.
Internal Controls
Beyond receivables and inventory, the examiner reviews accounts payable to spot competing claims and signs that trade vendors are tightening terms. The exam is also the lender’s best opportunity to assess whether your accounting systems and internal controls are adequate. Weak controls can result in additional reserves against your borrowing base.1Office of the Comptroller of the Currency. Asset-Based Lending – Comptroller’s Handbook
How the Results Change What You Can Borrow
The field exam recalibrates how much money you can actually draw. The examiner’s findings feed directly into the borrowing base certificate, which is the formula that determines your maximum available credit at any given time.
Advance Rates
Lenders apply advance rates to your eligible collateral. For accounts receivable, banks typically advance 70 to 80 percent of eligible receivables, with lower rates when risk is elevated. Inventory advance rates are considerably lower, generally between 20 and 65 percent, reflecting the greater difficulty and cost of liquidating physical goods.2Office of the Comptroller of the Currency. Accounts Receivable and Inventory Financing – Comptroller’s Handbook Advance rates higher than industry norms draw extra scrutiny from regulators.
Reserves and Adjustments
The examiner’s report recommends specific reserves: dilution reserves on receivables, obsolescence reserves on inventory, and sometimes additional reserves for control weaknesses. These reserves reduce your eligible collateral dollar-for-dollar. If the exam reveals a creeping dilution rate or a chunk of stale inventory, the lender will adjust the borrowing base downward. That means less availability, potentially at the worst possible time.
Unaddressed adverse field exam results should be reflected in the lender’s assessment of credit risk.1Office of the Comptroller of the Currency. Asset-Based Lending – Comptroller’s Handbook In practice, that can mean tighter advance rates, additional reporting requirements, more frequent exams, or, in serious cases, a triggered default under the loan agreement.
Who Pays
The cost is almost always passed on to the borrower, regardless of whether the lender uses internal staff or an outside firm.1Office of the Comptroller of the Currency. Asset-Based Lending – Comptroller’s Handbook Total costs vary with the complexity of your operations, the number of locations, and the examiner’s billing rate. A straightforward exam for a single-location borrower with clean records might cost a few thousand dollars. A multi-location company with complicated inventory or a messy A/R ledger will pay significantly more.
Because exams recur, these fees are a recurring line item in your cost of borrowing. Some loan agreements cap the number of lender-initiated exams per year at the borrower’s expense and shift extra exams to the lender’s cost unless a default or triggering event has occurred. Read your loan agreement carefully on this point.
How to Prepare
Preparation is where you have the most control. A well-prepared borrower can cut days off the on-site visit and avoid the delays that make examiners nervous.
Documents to Have Ready
Assemble a comprehensive package before the examiner arrives:
- Detailed A/R aging report, reconciled to the general ledger, current as of the exam date.
- Complete inventory listing with quantity, location, cost, and age for every item, reconciled to the general ledger.
- Sales journals, cash receipts, and disbursement records.
- Bank statements for all operating accounts, covering at least three to six months.
- Detailed, current A/P aging report.
- Lease agreements and UCC filings.
Reconcile everything to the general ledger first. Unreconciled reports are one of the fastest ways to slow down an exam and erode the examiner’s confidence in your controls.
Logistics and Staff
Designate a single primary contact, typically the controller or CFO, with authority to answer substantive questions and coordinate access. Provide a dedicated, private workspace with internet access and a printer. Arrange access to your accounting software and ERP system in advance so the examiner can trace transactions without waiting for IT.
Brief your accounting, sales, and warehouse teams on the scope and timing before the exam starts. The warehouse manager needs to be available to help locate specific inventory items for physical counts. Accounting staff should be ready to explain unusual transactions, revenue recognition policies, and credit memo activity. Staff who seem evasive or unprepared create the impression that leads to deeper testing and additional reserves.
What the On-Site Visit Looks Like
The on-site portion typically runs two to five days, though complex engagements can go longer. The examiner conducts interviews with key personnel to understand how your internal controls actually work in practice, as opposed to how they’re described in policy documents.
Physical observation is central, especially for inventory. The examiner counts a sample of high-value items and compares the results against your records. For receivables, the examiner traces sampled transactions from the original invoice through the accounting system to the ledger entry. This tracing work is where discrepancies tend to surface.
The visit ends with an exit interview, where the examiner walks through preliminary findings, potential eligibility issues, and any significant control problems with your primary contact. Take it seriously. It’s your chance to clarify misunderstandings or provide missing documentation before the final report is written. Examiners will generally consider additional context, but only if you provide it at this stage.
The Final Report
After the on-site visit, the examiner compiles a formal report for the lender. It details the procedures performed, findings, and the resulting calculation of eligible collateral values. It includes recommended adjustments to the borrowing base, the calculation of dilution and obsolescence reserves, and an assessment of control deficiencies. Regulatory guidance expects these reports to include trend analysis for receivable, inventory, and payable turnover, along with trends in sales, returns, and allowances.1Office of the Comptroller of the Currency. Asset-Based Lending – Comptroller’s Handbook
The lender uses the report to recalculate your borrowing base and, if warranted, adjust advance rates or impose new reserves. A clean exam confirms your existing availability and strengthens the lending relationship. An exam that uncovers problems will lead to a conversation about remediation steps, tighter monitoring, or reduced availability. Either way, the report becomes part of the permanent credit file that regulators review when examining the bank itself.