What is the objective of the inspection?

The inspection is performed by a third-party consulting firm and is used to confirm the accuracy of the data that the borrower has provided and that the borrower is in compliance with the loan agreement.  The inspection also assesses how the borrower’s infrastructure and policies enable compliance or could be improved.  Every growing company should continuously upgrade its financial systems and processes, and inspections inform that evolution.  Lenders providing lower-cost debt require more robust systems, redundancy and reporting, and upgrading systems will help the borrower access lower-cost debt more quickly. 

The loan tape and testing selections

At the start of the inspection process, the consulting firm will request the “loan tape”, which is the master “source of truth” of data for all the financial assets or receivables.  The loan tape should include data on both the customer and the history of each receivable, including, if relevant, all principal and interest repayment amounts and dates, the outstanding balance at each date, the delinquency status, and other information.  The consulting firm will then select groups of individual receivables to test the data and underlying processes in different areas.  Four common areas of testing are: (1) underwriting, (2) customer statements, (3) roll-forward balances, and (4) reconciliations with the borrower’s financial accounts.

• Underwriting The consulting firmwill review the underwriting and/or origination policies and confirm that they have been applied uniformly and consistently.  Specifically, they will want evidence that the borrower has collected the documents, performed the analyses, and obtained the internal approvals exactly as the borrower’s policies specify for each receivable selected for this test.

• Customer statements The consulting firmwill review all statements and other information that has been provided to the customers of the selected receivables during certain periods of time.  They will then compare the customer statements to the loan tape for the relevant time periods and verify the consistency of all data, such as the opening balance, closing balance, debits and credits, customer name and address, and delinquency status.

• Roll-forward balances The consulting firmwill review supporting documentation for how the selected receivables’ outstanding balances on the loan tape have changed (or “rolled forward”) from one point in time to another.  For example, they will ask to see checks, ACH/wire confirmations, bank statements, or other evidence from third parties for any payments that have been applied to the receivable.  More generally, they will require supporting documentation for any changes in the balances of the selected receivables during the specified time period. 

• Reconciliations The consulting firmwill ask for a triple reconciliation between bank statements, the loan tape and the related General Ledger (GL) accounts for specific time periods.  The borrower will need to explain any differences between the credits, debits, and opening and closing balances in all three of these data sources.

About Thayer Street

Thayer Street has partnered with a wide range of companies – from incubating de novo platforms to investing in or financing more mature growth businesses.  We can provide flexible equity and creative debt and hyrbid capital solutions to businesses that have asset-based financing potential but do not yet have their first ABL facility.  We can also help advise our partners on building best-in-class systems and infrastructure to enable them to scale their business and accelerate access to institutional ABL facilities and lower-cost capital.

The above is for illustrative purposes only and Thayer Street’s involvement will not necessarily result in or be the cause of a favorable outcome.