Years of increased economic challenges are causing lenders to take a step back and review their agribusiness portfolios. Lenders are scrutinizing agribusiness’s financial statements, tax returns, monthly borrowing base reports, and collateral with greater care and effort. In many cases, this takes the form of a field examination to obtain additional information.
What is a Field Examination?
Field exams are commonly utilized when you start a relationship with a new bank or during financial inspections. These exams focus on specific aspects of your business that a bank determines can impact their lending decisions; for example, the quality and condition of inventory, collectability of receivables, customer concentrations, and related party relationships. It is not an audit. The requested criteria for a field exam are determined by the bank; and they use these criteria to establish and maintain compliance with regulators and demonstrate to loan committees their commitment to making prudent investments.
Field examinations are often performed to gain all the necessary information the bank needs about you and your operations. It is also used to address profitability or liquidity concerns.
Typically, a field examination is conducted by in-house personnel from the bank or a third-party hired by the bank. The cost is often endured by the agribusiness. Here are a few tips to make sure the process goes as smoothly as possible:
- Make sure your records are completed, up-to-date, and well organized
- Communicate with your banker on the front-end to see if you can take any steps to limit the scope of the exam
- Provide requested information beforehand to prevent unnecessary procedures by the examiners
What to Do After a Field Exam
Once the exam is complete, be sure to request a copy of the results for your loan files with the bank. This document is as important as the financial statements or tax returns you submit. Read through the exam and verify that all information is correct and that you are in agreement with the results. In the event that you do find information that you do not agree with, be prepared to explain this to your banker by providing supporting documentation to back your position.
Next, you can discuss the results of your exam with your banker to determine whether any changes can be made to your operations to strengthen your position. For example, this could be an inventory backlog that you could improve to increase the rate on your borrowing base—or you could have unnecessary price exposure that make you a risky borrower.
The Benefits of a Field Examination
While at first it may seem like a burden to have a field examination performed, there are ample benefits for you and your agriculture business. A field exam can potentially prevent your bank from requesting a higher, more expensive level of certification on your financial statements, such as an audit. The exam provides you an opportunity to re-inspect your operations and its efficiencies. It also strengthens your relationship with your bank. While it may seem like, at first, your bank is questioning the credibility of your business; oftentimes, the bank is simply looking for evidence to prove what they already know about you—in order to share that information on paper with lending committees and regulators.
In addition, Generally Accepted Accounting Principles (GAAP) accrual accounting has historically proven difficult for producers to convert to, as many agriculture producers use cash basis accounting for taxes. By submitting to a field exam, rather than needing to provide GAAP financials, you can save effort and expense.
This year’s growing conditions bring an unprecedented level of uncertainty for producers in the Midwest, on top of several difficult economic years. Prices continue to fluctuate due to trade disputes—with, unfortunately, no foreseeable end in sight.
All of this creates risks for lenders. A field exam is a tool you can have banks use to evaluate your creditworthiness. Being prepared and communicating with your bank throughout this exam ensures you come out of the process with the banking relationship and financing you need.
For more information about field examinations or for a third-party evaluator during this process, please contact our agribusiness experts.