By Ollie Sutherin, Chief Financial Officer, Young & Associates
Asset-based lending (ABL) is a creative financing alternative that will unlock additional working capital for businesses. While it appears more complex than traditional commercial real estate transactions, the appropriate training and education eliminate intimidation. Many community financial institutions tend to avoid ABL opportunities due to the perceived burden of ongoing monitoring. However, with the appropriate due diligence at the outset of a lending relationship, the process becomes significantly more manageable and efficient.
The Reality of Ongoing Monitoring in Asset-Based Lending
Having worked at a small regional bank, I experienced firsthand the detail-oriented process of handling ABL monitoring. Line of credit renewals often relied heavily on borrowing base certificates (BBCs)—many of which lacked accuracy and detail. Field examinations were seldom part of the equation, and decisions were often based on whether the BBC appeared “sufficient” to support the requested loan amount, whether payments were current, and whether principal was being retired in a frequent manner. What was consistently overlooked were several critical elements:
- Early detection of fraud or irregularities
- Evaluation of internal operational controls
- Comprehensive and consistent collateral eligibility testing
- Longitudinal trend analysis and risk monitoring
Field Exams: A Vital Tool for Risk Mitigation
In today’s competitive lending environment, speed and efficiency are crucial. However, it’s imperative not to sacrifice thorough due diligence for the sake of expediency. Relying solely on BBCs without incorporating periodic field examinations introduces significant risk—risk that could far outweigh the relatively modest cost of performing a field exam. The reality is clear: a field exam provides the lender with a deeper understanding of the borrower’s financial health, operational integrity, and collateral quality. The field exam also provides information that can be used to set appropriate advance rates for the various collateral types.
You Don’t Know What You Don’t Know
One illustrative example comes from a colleague who shared her first field examination experience shortly after completing her training and certification. She was tasked with examining receivables for a large borrower. Drawing on the tools and methodology she had just mastered, she uncovered a serious case of fraud whereby the borrower was systematically crediting and rebilling invoices once they aged past 90 days. This practice inflated the eligible receivables reported in the BBC and granted the borrower significantly more borrowing availability than permitted.. Without the field exam, this fraud would likely have continued undetected—exposing the financial institution to considerable, non-avoidable risk.
While instances like these may not occur every day, they underscore an essential truth: you don’t know what you don’t know. Field examinations offer lenders a proactive mechanism to confirm the integrity of a borrower’s financial reporting and ensure continued creditworthiness. In asset-based lending, that peace of mind over your relationships far outweighs the small investment.
How Y&A Can Support Your Lending Program
Asset-based lending can open new avenues for community financial institutions, but it also introduces unique risks that require careful, ongoing oversight—particularly through field exams and detailed collateral monitoring. As illustrated, relying solely on surface-level reporting leaves institutions vulnerable to inaccuracies and potential fraud.
Our Y&A Credit Services team provides a wide range of solutions that support strong credit risk management, including credit underwriting, underwriting reviews, and credit administration. These services can help your institution build a solid foundation for managing more complex lending relationships like ABL.
If your team is looking to enhance credit processes, improve documentation quality, or strengthen internal controls, Young & Associates is here to help you prepare—strategically and confidently—for what’s ahead. Reach out to us today for a free consultation.
