By Brian Jacobson, CPA
Gray, Gray & Gray, LLP
“Trust, but verify.” President Ronald Reagan’s sage advice about arms negotiations is also appropriate when lending money or investing capital. If you are a lender or venture capital firm, it is incumbent on you to discover the facts about the ability of a borrower to pay back a loan, or a start-up to produce a return on your investment.
Borrowers eager to obtain financing may be able to provide substantial background information and a thick stack of reports showing themselves to be credit worthy. But due diligence on the part of a lender or investor requires digging deeper to discover the truth. That’s where a field examination can become an invaluable tool in the verification process.
Put simply, a field examination is an independent, in-depth review of a borrower’s actual financial condition. In a typical field examination, the examiner scrutinizes the value of assets held as collateral, assesses risks to the collateral, investigates internal financial controls and financial management practices, and sets up monitoring of the collateral supporting a loan, credit line, or capital investment. The result is a clear and unbiased opinion of the borrower’s true financial picture, including any possible issues. The field examination report generally includes recommendations to the lender or investor.
The process is called a “field” examination because it typically takes place at the borrower’s location (or at the offices of the borrower’s accounting firm) where financial records can be accessed directly.
Not every loan or investment requires such scrutiny. But any lending that involves a significant amount of money – as defined by the lender – can benefit from the close inspection provided by a field examination. Here are the top five reasons why you may consider having a field examination conducted prior to lending or investing.
- New Borrowers. How much do you know about the company asking for a loan or credit line? Borrowers without a history with you may have an unbalanced history with someone else. A field examination will provide either a warning or reassurance about the ability of the borrower to pay back the loan.
- Unstable Businesses seek financing for many reasons, among them the need to shore up financial results . A field examination can uncover fundamental weaknesses in a company’s business model or market that might undercut their financial stability.
- Covenant Issues. Borrowers who miss financial milestones may have underlying financial control issues that can be revealed by an in-depth field examination.
- Management Issues. A company whose leadership is in transition, or whose management has shown an inability to deal with business challenges, may also be facing financial problems. Experienced field examination professionals can identify troublesome trends and make recommendations for corrective action.
- Questionable Financial Statements. Some lenders can be misled by a borrower’s tangled web of financial reporting history. What looks good on paper might not, in reality, support the loan or credit line you are about to provide. The right field examiner will “red flag” questionable trends or spotty reporting.
If you are in the business of lending money or investing in businesses, it is essential that you know as much as possible about your borrowers, their true financial position, and their ability to repay. A field examination is the surest way to assess the “real world” financial condition of a company with which you are conducting business.
If you’d like to learn more about field examinations, please visit the field examinations page on Gray, Gray & Gray’s website, or contact me at (781) 407-0300.
Brian Jacobson, CPA, is Director of Field Examinations and Client Accounting Services for Gray, Gray & Gray Certified Public Accountants in Canton, MA.