How to Prepare for Your First ABL Field Exam: A Borrower's Week-by-Week Playbook

Why the First Field Exam Sets the Tone for Years

The first field exam is the single most consequential event in the early life of an ABL relationship. The examiner is not auditing financial statements -- a CPA does that. The examiner is testing whether the collateral the lender thinks is in the borrowing base actually exists, whether the data the borrower reports is accurate, and whether the borrower has the systems and discipline to operate inside a borrowing base-driven facility.

The output of the exam is a report that the lender's credit team uses to set initial advance rates, define ineligible categories, calibrate dilution reserves, set field exam frequency going forward, and shape covenant tightness. A clean first exam typically produces 80 to 85 percent AR advance rates, NOLV-based inventory advance rates without significant haircuts, and semi-annual or annual exam cadence. A messy first exam produces 75 to 80 percent AR advance rates with extra reserves, tighter inventory eligibility, quarterly field exam frequency, and a tone in the credit relationship that takes years to repair.

The mechanics of what a field exam covers are detailed in our field exam fundamentals guide. This piece is the operational counterpart: the week-by-week preparation playbook borrowers should run before the examiner arrives.

At Don Clarke Enterprises we have prepared dozens of first-time ABL borrowers for field exams across every major industry and lender. Donald Clarke founded Asset Based Lending Consultants in 1986, was inducted into the SFNet Hall of Fame in 2021, and authored Asset Based Lending Disciplines, the first textbook on the discipline. He has trained more than 5,000 lending professionals at GE Capital, JP Morgan Chase, Lloyds, and Barclays -- including in field exam methodology. The disciplines covered in his textbook are the same disciplines field examiners apply today. We do not consult. We execute.

What the Examiner Will Actually Do

A typical first field exam takes three to five days on-site, sometimes longer for complex borrowers. The Secured Finance Network frames the scope as the full working capital cycle plus payroll tax compliance. In practice the examiner runs four core work streams:

• Accounts receivable. Aging accuracy, eligibility testing, dilution analysis, concentration analysis, invoice-to-shipping document testing, cash application review, and AR roll-forward.
• Inventory. Perpetual system accuracy, physical count or sample test, valuation method review, turnover and obsolescence analysis, and reconciliation of perpetual to GL to recent borrowing base.
• Accounts payable and accrued liabilities. Trade payable aging, supplier concentration, priority payables (taxes, payroll, sales tax), and identification of any AP that creates set-off risk against AR.
• Controls and reporting. Walk-throughs of order entry, billing, cash application, credit memo issuance, inventory receiving, and the borrowing base certificate preparation process.

Everything in the prep playbook below ties back to one of these four streams.

Four Weeks Before: System and Reporting Readiness

Confirm AR Aging Methodology

Examiners need to know whether your AR aging is invoice-date based or due-date based, and whether your aging buckets match the lender's eligibility definitions. Most ABL agreements define a 90-day eligibility cutoff measured from invoice date or due date -- different cutoffs produce materially different eligible AR. Run aging reports both ways and identify the methodology that matches your loan agreement. If your ERP only supports one method, document the offset.

Verify Perpetual Inventory System

If you are running a periodic inventory system -- counting at year-end and estimating in between -- you will get advance rate haircuts or be put on quarterly counts. ABL lenders expect perpetual inventory. If you are on periodic, get on perpetual before the exam or be prepared for the consequences. If you are on perpetual, run a perpetual-to-GL reconciliation now and identify the variance, the source of the variance, and the fix.

Pull Three Recent Borrowing Base Certificates

The examiner will tie the most recent borrowing base certificate (BBC) back to source data. Pull your last three certificates and reconcile each line back to the underlying AR aging, perpetual inventory report, and ineligibility calculations. The reconciliation should be auditable in under 15 minutes per certificate. If it takes longer than that, your BBC preparation process needs documentation before the examiner shows up.

Identify the BBC Owner

The examiner will want a single point of contact for borrowing base questions. Designate that person -- usually the controller, AR manager, or treasury analyst -- and make sure they own every BBC element. Examiners read divided ownership as a control weakness. The standard practices outlined in our borrowing base monitoring guide apply, with extra emphasis on documented ownership.

Three Weeks Before: AR Hygiene

Reconcile AR Aging to General Ledger

The single most common first-exam finding is a variance between the AR aging report and the GL AR balance. The reconciliation should run every month-end and the variance should be either zero or fully explained by timing items posted to GL but not yet to subledger (or vice versa). If your reconciliation is not clean, fix it before the examiner arrives. Variances flagged in an exam without explanation get treated as control weaknesses and produce reserves.

Clean Up Aged Credit Balances

Credit balances on customer accounts (overpayments, unapplied cash, customer credits) reduce eligible AR if they are not properly accounted for. Run a credit balance report 30 days before the exam, identify accounts with credit balances over 60 days old, and either apply the credits, refund them, or write them off through accounting. Aged credits sitting on the AR ledger are an examiner red flag.

Inventory the Standard Ineligibility Categories

The eight standard ineligibility categories covered in our eligibility guide -- past-due, foreign, intercompany, government, contra accounts, concentrated, disputed, and bankrupt obligors -- should be tagged in your AR system or in a parallel tracker. The examiner will calculate ineligibles independently from raw data. If your reported ineligibles do not match the examiner's calculation, the lender will apply reserves until you can reconcile. Build your ineligible report now, test it against the examiner's likely methodology, and fix gaps.

Calculate Rolling 12-Month Dilution

Dilution -- credit memos plus write-offs plus volume rebates plus disputed-then-resolved adjustments, divided by gross billings -- is one of the highest-impact numbers in the exam. Lenders apply dilution reserves above the 5 percent threshold typically. Calculate your trailing 12-month dilution now using the same methodology the examiner will use. If dilution runs above 5 percent, prepare a documented explanation of the components and a remediation plan. If it runs above 8 percent, expect reserves and plan accordingly.

Two Weeks Before: Inventory and AP

Reconcile Perpetual Inventory to GL

Run the perpetual inventory report at month-end and reconcile to the GL inventory balance. Variances over 2 percent are an examiner red flag. Identify the source -- timing differences, valuation method conflicts, reserves not booked, count adjustments -- and document the explanation. If you cannot reconcile, the lender will assume the perpetual is unreliable and tighten advance rates.

Document Inventory Valuation Method

Examiners want to know whether you are running FIFO, weighted average, or standard cost. They want to know what overhead is absorbed into inventory and how. They want to know your obsolescence reserve methodology and the dollar amount of obsolete inventory currently on the books. None of this is hard to explain if you have a written inventory accounting policy. If you do not, write one now -- a one-page document with the valuation method, overhead absorption rules, obsolescence reserve calculation, and physical count cadence is enough.

Tag Slow-Moving and Obsolete Inventory

Inventory items not sold in 12 months are typically ineligible for advance. Run an aged inventory report 30 days before the exam, identify items over 12 months old, and either move them to obsolete inventory (with appropriate reserve) or document why they remain eligible (long-cycle production inventory, regulated stock, etc). Surprise findings of aged inventory at exam produce both ineligibility and a credibility hit.

Pull AP Aging and Tax Status

Examiners always run a payroll tax and sales tax compliance test. Pull the most recent quarterly payroll tax filings (Forms 941 and equivalent state filings), confirm filings are current, and confirm payments are current. Same for sales tax. Trade AP aging should show no abnormal stretching beyond your normal terms -- AP days that have walked out from 30 to 75 days in the last six months are a working capital warning sign that the examiner will flag.

One Week Before: Documentation Package

The examiner will issue a Provided By Client (PBC) list a week or two before arrival. Standard items include:

• Most recent month-end AR aging in detail (invoice-level)
• Most recent month-end perpetual inventory report
• Trial balance and detailed GL for AR, inventory, AP for the last 13 months
• Last three borrowing base certificates with supporting calculations
• Customer concentration report (top 20 customers, percentage of total AR)
• Top 20 supplier concentration on AP
• Bank statements for all operating, lockbox, and disbursement accounts for the last three months
• Sample of invoices, shipping documents, and proof-of-delivery for AR sample testing
• Most recent quarterly payroll tax filings and confirmation of payment
• Inventory accounting policy and obsolescence reserve calculation
• Organization chart and key personnel contact list
• Last audited or reviewed financial statements

Build the package as a single organized folder structure. Examiners value clean documentation organization the way controllers value clean reconciliations -- it is a proxy for the operational discipline the lender is paying to verify. Sloppy PBC delivery sets the tone for the entire exam.

The Eight Items First-Time Borrowers Miss Most Often

From running this process repeatedly, the items first-time borrowers miss are remarkably consistent:

1. Aging methodology mismatch. The AR aging methodology in the ERP does not match the eligibility definition in the loan agreement. Easy to fix before the exam, expensive to discover during.
2. Unapplied cash. Cash receipts sitting in suspense accounts because they cannot be matched to specific invoices. Reduces eligible AR and signals weak cash application controls.
3. Cross-aging exposure. When 25 percent or more of a single obligor's receivables become 90+ days, the entire account becomes ineligible. Most borrowers do not run cross-aging analysis until the examiner does, and the surprise can be significant.
4. Contra-accounts. Customers who are also vendors create set-off risk. The contra-AR equals the lesser of AR and AP with that obligor and is ineligible. Most ERPs do not flag contra automatically.
5. Government receivables. Federal receivables without Notice of Assignment compliance, state and municipal receivables with anti-assignment provisions, or healthcare receivables from Medicare/Medicaid. Each carries the eligibility issues covered in our government contractor and healthcare receivables guides.
6. Foreign AR without credit support. Receivables from foreign obligors are typically ineligible unless backed by a confirmed letter of credit or credit insurance. Borrowers with material export sales often have this carve-out and do not know it.
7. In-transit and unbilled inventory. Goods in transit and WIP often have specific eligibility rules. The examiner will test whether reported eligible inventory complies with the loan agreement language. Mismatches produce reserves.
8. Insurance certificates. The lender requires certificates of insurance naming the lender as loss payee for property/inventory and additional insured for liability. The examiner will pull and review. Out-of-date certificates produce defaults at the worst time.

During the Exam: How to Behave

The borrower-side rule is simple: be transparent, be responsive, and do not improvise answers. If the examiner asks a question and the right answer is "I need to check that and come back to you in an hour", say so. Examiners read confident-but-wrong answers as a control problem. They read "let me confirm" as healthy discipline.

Designate a single point of contact -- usually the CFO or controller -- to interface with the examiner each morning. Brief the team in advance that any document requests come through that contact. Avoid having three different people send three different versions of the same report.

If the examiner identifies a finding during the exam, ask for the specifics, ask what would resolve it, and resolve it before the exam closes if possible. Findings that get resolved during fieldwork rarely appear in the final report. Findings that get pushed back on without good answers usually do.

After the Exam: The Closing Conference and Report

Most field exams end with a closing conference between the examiner, the borrower's CFO, and (sometimes) the lender's portfolio manager. The examiner walks through findings, draft conclusions, and proposed reserves. This is the borrower's last opportunity to correct factual errors, add context, or commit to remediation that will affect the reserve treatment.

The final exam report typically lands two to three weeks after fieldwork. The borrower receives a copy and has a window -- usually 10 business days -- to respond in writing to findings. Use it. Specific, documented responses to findings produce better outcomes than silence or vague pushback.

Why DCE

First-time field exams are a high-leverage event. Done well, they produce a clean baseline that compounds across years of the ABL relationship -- higher advance rates, looser covenants, less frequent re-exam, better lender relationship. Done poorly, they produce reserves, tighter eligibility, more frequent exams, and a credit relationship that is harder to refinance out of.

The good news is field exam preparation is a process, not a mystery. The disciplines are the same disciplines field examiners apply -- and the same disciplines covered in Don's textbook, which lender training programs have used to train examiners for decades. Borrowers who run the process methodically arrive at the exam with no surprises.

If you are preparing for your first ABL field exam, have an exam coming up that needs more preparation than your team can handle internally, or want a pre-exam assessment before the examiner arrives, we can help.

We do not consult. We execute.