Asset-based lenders face a very competitive market. Asset-based loans typically deliver higher returns than other forms of financing, so more financial institutions are starting to make them, and established players in the market are starting to make more of them. As a result, borrowers now have more options when seeking asset-based financing. The increased availability of these loans has driven lenders to focus on reducing administrative costs in order to present a borrower with the most attractive proposal.
One component that is scrutinized when evaluating the administrative costs of an asset-based loan is the collateral field examination. Some lenders try to reduce the cost of the exam by weighting their reviews more heavily toward a borrower’s books while others may forego a field examination altogether. The lower administrative costs might make a loan more attractive to a borrower, but failure to properly examine collateral can add significant exposure to one of the riskiest types of loans without delivering any additional reward to the lender.
In fact, field examination services can be one of the most cost-effective practices available to an asset-based lender when assembling a financing package that serves the borrower and protects the financial institution. The key to getting the full value of a field collateral examination is evaluating in-house and outsourced options with an eye toward five criteria:
- Experience of the examiner
- Staffing depth
- Service support
- Industry expertise
No magic number of examinations will qualify a collateral field examiner to do a particular review. There is also no credential or license that certifies someone as an expert in the field. However, the relative value of one examiner against another can be measured by the number of exams completed, the years spent performing examinations and the variety of industries and assets examined.
As a lender, consider the complexity of the collateral involved in the loan and match that up against an examiner’s history. It’s certainly important to ask how many examinations a person or a team has performed, but you also want to understand the types of exams performed and how many times an examiner has raised questions about collateral that protected a lender in the long run. Does the examiner have experience with the industry in question?
If you have an in-house resource available for these types of exams, you should not assume this resource is the best option to examine the collateral for every loan. Each industry has subtle nuances that require different skillsets from a collateral reviewer, and every business has its own processes and quirks that not all reviewers thoroughly understand. We frequently find that in-house field examination resources might approach the process with more of an academic, GAAP-type approach. Examiners with a better financial operational background, the kind developed by repeating the examination process frequently in different industries, tend to be more effective.
The best examiner has successfully completed a broad spectrum of engagements but still has an appreciation for each individual business’ uniqueness. Whether you’re evaluating competing offers from outside exam service providers or weighing the cost of an outside provider versus inside resources, the ability of the examiner to accurately review the collateral in question for a particular loan needs to be considered as much as the potential cost.
As noted previously, the market for asset-based loans is competitive. It’s not enough to deliver a financing proposal that keeps administrative costs low — prospective lenders need to deliver proposals quickly. Some lenders consider foregoing the field examination because it can add significant time to the proposal process. But some field examiners are able to deliver services quickly and efficiently throughout the U.S. and, if necessary, around the globe.
If you’re talking with a field examination provider about a proposal, ask about the timetable for completion of the exam. Get specific information about what resources are available and how quickly they can be deployed to the collateral’s location. Find out if they have experienced employees on staff or if they rely heavily on contractors hired on short notice to scale up their ability to deliver on your schedule. Some field examination providers have full-time employees working from home in locations around the country to help manage costs and perform an examination as quickly as possible.
It’s important for an asset-based lender to have accurate information about a borrower’s collateral, but that information is worthless if it is not delivered in time to get the proposal to the borrower before a decision is made.
Any good field examiner can tell you that not all examinations begin and end in the field. Sometimes exams raise questions that may require a closer look at financial and/or collateral records. Given the tight timeline of the proposal process, an examiner needs to demonstrate a track record of working closely with company personnel and their financial advisers to answer questions without causing delays. An examiner should also have ready access to a support network of accountants and advisers who can provide guidance on what questions should be asked of the borrower and what answers should be considered acceptable.
Even examinations that appear routine at the outset can lead to an issue that may cause concern about the collateral. An experienced examiner will have an eye for identifying those issues and a process for resolving them quickly to keep a financing proposal on track or to warn a lender of potential irregularities at the earliest possible stage.
Location, Location, Location
In an environment where lenders are working hard to reduce borrowers’ administrative costs, few things can raise expenses and eyebrows faster than flying a team of experts around the country on short notice to examine collateral. A field examination provides valuable risk management for a lender, but it has to be done in a way that keeps the proposal competitive.
When faced with a borrower that wants to secure a loan with collateral in different locations around the U.S., lenders should ask if a field examiner has personnel in those regions. Some examiners can serve a few markets cost effectively, but the price goes up significantly if the collateral is not near any of their offices. As noted previously, other examiners have full-time employees who work remotely from home offices throughout the country to reduce travel costs and provide faster service. To get the best picture of what a potential examiner offers, ask specific questions to determine if the professionals involved with investigating the collateral will be experienced employees with a track record of successful field examinations, or, conversely, contractors hired locally and trained on the fly to complete specific engagements.
Some industries maintain equipment and inventory that requires specialized knowledge to evaluate. When considering a field exam provider, lenders need to be sure that the team has knowledge of the types of assets that will collateralize the loan and the industries in which they are used.
An examiner who has completed a significant number of examinations across a broad spectrum of industries is valuable. That value does not diminish when a potential lender operates in an area that requires specific expertise. The breadth of experience gives an examiner a broad view of each engagement and helps that person understand the big picture surrounding a borrower’s operations. As a lender evaluating potential field collection examiners, you should be looking for a provider that has conducted numerous examinations of all types and has a staff that has worked repeatedly in a particular borrower’s specialized industry.
The key to successful asset-based lending is confidence that the terms of the loan accurately reflect the collateral securing the obligation. A thorough field examination by an experienced provider is the most effective way to gain that confidence. Lenders concerned that the time and money spent on field examinations might make their proposals less attractive should evaluate providers on the five qualifiers to ensure the highest value at a reasonable cost.