May 28, 2020 – Dheeraj Balani and Russell Barber recently authored an article for The Secured Lender, the national publication from the Secured Finance Network. The SFNet represents all secured finance companies including asset-based lenders, factoring, supply chain finance/trade finance, and the service providers, among others, all who support and enable capital to small to medium sized businesses. We invite you to read the excerpt below, and continue to the article in its entirety via the Secured Finance Network website.
Assessment of Damage and Alerts for Fraud.
Significant disruptions in credit quality have facilitated the need for field examiners to be on alert for situations that are generally not prevalent in a more stable environment. A borrower and their employees’ lives and livelihood have suffered material impact during the COVID-19 crisis between those forced into unemployment or for those forced to significantly alter the way in which they fulfill their job duties. Business owners that might never have been considered a credit risk now face the prospect of having to consume current profits to pay off mounting obligations that accrued when their revenue stream dropped to zero. The retail recovery from this crisis will likely be slow as consumer attitudes will have been significantly altered. That slow recovery will impact commercial businesses and service companies that serve those outlets as well as energy and infrastructure companies through lower demand.
Field examiners and the commercial lenders have an opportunity to embrace new effective guidance while addressing key areas of concern in this new lending environment.
An Assessment of “Collateral” Damage Sustained by the Lender
For a field examiner in the post-crisis environment, the need to assess the lender’s current collateral position is vital. The field examiner should also pay close attention to the level of current activity at a borrower’s location and relay any concerns to the lender. While analysts will be keenly focused on financial performance and covenant compliance, it is the field examiner’s responsibility to offer a sound evaluation of the quality and performance of what could likely be the lender’s primary means of repayment in a liquidation. This is true even for credits that were previously deemed “cash flow” borrowers.
With regards to accounts receivable (A/R), extensive testing and analysis should be performed to ascertain the quality of the asset and accuracy of the reporting document. There is likely to have been deterioration due to trade accounts slowing down payment. There is also a risk of extensive credit activity as purchases are returned and customer allowances are pushed forward. Are invoices well supported? Are cash receipts being posted timely and correctly? In a time of financial stress, even good people make bad decisions and the easiest method to clean up ineligibles in a formula- driven line of credit is via misapplication of cash receipts.