October 12, 2018 – When it comes to lending, banks and commercial finance companies engage organizations such as Dopkins & Company to assist with gauging a borrower’s creditworthiness. The overall system evaluates more than just the collateral securing a loan – i.e. the accounts receivable, inventory, equipment, or any asset which can act as a backup source if a borrower cannot repay their debts. Today’s blog post investigates the factors behind why a Field Examiner’s insights into the five C’s of credit (Character, Capacity, Capital, Conditions and Collateral) are critical.
Collateral examinations by definition assist clients by defining and assessing the collateral used to secure current or potential debt. A Field Examiner’s primary focus is on the qualitative and quantitative analysis of any and all available collateral, while simultaneously assessing the remaining characteristics in determining a borrower’s overall creditworthiness.
Lenders and underwriters will review a borrower’s credit report, credit scores, financial statements, and other documentation in order to perform due diligence on the borrower to assess their Character. However, organizations such as Experian, TransUnion, Equifax and ultimately Fair Isaac Corporation (FICO) can only convey so much. Serving as the eyes and ears on behalf of a lender, onsite Field Examiners are keenly able to evaluate the character of a borrower beyond what a credit report can provide beginning immediately when the engagement is set up. A Field Examiner can provide insights into questions such as:
- What is the borrower’s response? Was there any push back to the original request list or initial communication?
- Is the owner, CEO, or principal stakeholder happy to converse with you?
- Are they transparent, pleasant in open conversations whether detailed or small talk, or are they short providing limited or no response to questions and requests?
- Was the Examiner tucked away in the back corner with no internet access?
These are just a few examples of an endless list used to evaluate the true character of a Company and the people who run it, as well as the additional valuable insights a Field Examiner can provide to lenders.
Capacity, or the borrower’s ability to re-pay the loan, could be as simple as measuring the Company’s income to recurring debts and assessing the current debt-to-income (DTI) ratio. Examiners, armed with the borrower’s historical financial data analyze net income, EBIDTA, gross margins, A/R and non-A/R sales, customer concentrations for additional insight into the capacity and cash flow of the borrower. Armed with this arsenal of financial data, Field Examiners will also opine on the Capital employed or the extent to which the borrower has “skin in the game” and has contributed to their Company’s investment or retention for future growth.
Field Examiners also provide the opportunity to step away from the engagement numbers, and take a good look at the borrower’s industry, competition, and historical performance. The Conditions of the loan, such as the amount, the interest rate and the borrowing structure or borrowing base are paramount, while environmental and economic conditions are also of equal significance. Experienced Field Examiners who have looked at numerous operating entities, across many industries add much value also to the conditions within which the borrower operates.
On a national level, a Field Examination Team’s service on behalf of lenders and financial institutions reflect that in many cases the examiners have been on site to either borrower client facilities, or their respective competitors. By doing so, the Examiners possess a keen qualitative understanding of the conditions surrounding dozens of industries.
Putting the Five C’s Together – Dopkins Approach
DAC Collateral Examinations add value to our customers and take the engagement one step further by knowing the importance of the five C’s of credit and performing a thorough exam with each C in mind. Our Collateral Examiners realize the importance of a borrower’s character, specific loan and industry wide conditions, and the importance capacity (cash flow) and capital play in evaluating the financing relationships.
About the Author
Joseph A. Heim CFE, CPA
Joseph Heim has over 25 years' experience investigating matters involving white-collar crime, fraud and corruption. He provides forensic accounting, litigation support and expert witness services to businesses, attorneys and commercial finance lenders. He is the Partner in charge of Dopkins Asset Based Lending Consulting Services.