Finance term
Field Examination
Also known as: field exam, collateral audit, ABL field audit
Definition
An on-site audit conducted by a lender or third-party firm to verify the accuracy of a borrower's borrowing-base certificate, the existence of pledged collateral, and the integrity of internal controls.
Detailed explanation
A field examination (field exam) is a scheduled or surprise on-site review that ABL lenders conduct to validate what a borrower reports on its borrowing-base certificate. Because ABL revolvers are self-reported collateral facilities—the borrower certifies eligible A/R and inventory each week—lenders periodically send examiners to confirm that the numbers match reality.
A typical field exam covers: - **A/R verification** — reconciling the borrower's aging report to the general ledger, testing invoices for legitimacy, confirming debtors exist and balances are accurate. - **Inventory count and appraisal** — physically counting and appraising finished goods, raw materials, and WIP; identifying obsolete or damaged items. - **Dilution analysis** — calculating the historic rate of credits, returns, and disputes against gross invoiced amounts, which informs the advance rate. - **Internal controls review** — evaluating cash application procedures, billing controls, and management reporting. - **UCC lien search** — confirming no undisclosed liens have attached to the collateral.
Field exams are typically performed at origination (before closing), annually for healthy borrowers, and more frequently (quarterly or on-demand) if the lender identifies deteriorating trends. The FDIC's supervisory guidance for ABL portfolios specifies that bank examiners review whether lenders have field exam programs proportionate to facility size and risk (https://www.fdic.gov/regulations/examinations/supervisory/insights/siwin04/abltranscript.html). The Federal Reserve similarly instructs commercial bank examiners to evaluate the adequacy of ABL monitoring programs, including frequency of field exams (https://www.federalreserve.gov/supervisionreg/topics/commercial_lending.htm).
Costs—typically $5,000–$25,000 per exam—are passed to the borrower as a loan expense and should be budgeted annually.
◈ Worked example
- Before closing a $5M ABL revolving line, the lender sends a field exam team for three days to verify the manufacturer's A/R aging and count raw-material inventory.
- After a quarterly borrowing-base certificate shows a sudden spike in eligible A/R, the lender triggers a surprise field exam and discovers $400K in fictitious invoices.
Common questions
The most-asked questions about Field Examination — answered straightforwardly.
How long does a field examination take? +
Typically 2–5 business days on-site for a mid-market ABL borrower, followed by a 1–2 week report drafting period. Larger or more complex facilities can take two weeks on-site.
Who pays for the field exam? +
Almost always the borrower. Costs ($5K–$25K) are specified in the credit agreement as a reimbursable expense and can be paid from the revolver itself.
Can a field exam trigger a default? +
Yes. If the examiner finds material misrepresentation in borrowing-base certificates, undisclosed liens, or inventory significantly below reported levels, the lender can declare an event of default.
Further reading
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