Commonly overlooked ineligible accounts receivable can significantly affect the amount of collateral available in a borrowing base. This document outlines common types of ineligible A/R, such as accounts over 60 days past due or with aged credits, that are often not properly reported by borrowers. A case example showed over $600,000 in unreported ineligible A/R, demonstrating how thorough reviews are needed. Prevention techniques for lenders include understanding industry practices, reviewing supporting documentation, and performing trend analyses or third party audits.

1. Borrowing Base – Overlooked Ineligibles Can Affect Collateral!!!

2. Topics Borrowing base analysis Review of common ineligibles Prevention techniques About Lender's Consulting Group www.LendersConsulting.com

3. 51,954 171,092 493,869 Common Ineligible A/R submitted by Borrower! Commonly unreported Ineligible A/R! OVER $600,000 difference in available A/R!!!

4. A/R Ineligibles (a) – Over 60 Accounts over 60 days past due (or any other predetermined time frame)

5. A/R Ineligibles (b) – Aged Credits Credit balances that age into the +90 day column reduce the aggregate balance of these ineligibles which increases the company’s availability.

6. A/R Ineligibles (c) – Cross Aged An account debtor that has an over 90 days old A/R balance that makes up 50% or more of entire A/R balance. In this instance, the entire A/R balance is ineligible.

7. A/R Ineligibles (d) - Contra Payables owed to an account debtor that could be offset against A/R, especially during a liquidation.

8. A/R Ineligibles (e) – COD/ Credit Card Account Debtor that is not extended payment terms. Reference A/R aging, customer invoice, or customer contract for payment terms.

9. A/R Ineligibles (f) – Credit Hold Account debtors that have been placed on credit hold by the borrower/client or existing lender.

10. A/R Ineligibles (g) – Unapplied Cash Unapplied cash refers to payments received in the form of check, cash or wire from customers that the borrower has not yet applied the payment to the open receivable on the A/R aging. The unapplied cash ineligible was calculated by comparing the A/R manager’s unapplied cash receipts (physical checks received or wires received) to the current eligible outstanding A/R invoices by customer. For example; A customer has total eligible A/R of $100,000.00. The borrower has received a check for $50,000.00 but has yet to apply the payment to the A/R due to various reasons, the true eligible A/R for that customer should be a net $50,000.00.

11. Other Common A/R Ineligibles Intercompany or affiliated accounts- receivables from entities that have common ownership and/or management. Progress billings- invoices billed on long-term projects as a percentage of completion or milestone billing (common in the construction industry) Bill and hold or consignment accounts- Invoices that have been billed but are being held find their way onto the A/R aging report. Similarly consigned sales may have created an invoice but the account debtor is not obligated to pay the invoice unless the good is sold to the end user. Pre-billed accounts- Invoices that have been created prior to the product shipping or before the service has been performed. www.LendersConsulting.com

12. Other Common A/R Ineligibles Accounts with “hidden liens”- some industries provide preferential lien rights to sellers that can supersede a bank’s lien. Installment sales or notes- Installment sales are not accounts receivable and therefore should not be in the A/R aging report. Consumer accounts- consumer A/R is significantly harder to collect than B2B A/R. Consumers law contains many layers of protection to consumers against collection. Foreign accounts (outside the U.S. or Canada – unless insured)- logistically foreign receivables are difficult to collect and foreign entities typically are not subject to domestic laws also making collection difficult. www.LendersConsulting.com

13. Prevention Understand the company’s industry and learn of any unusual inventory or accounts receivable practice. Learn how your client sells, invoices and collects. Know the paper trail! Insist on timely borrowing base reports and all supporting material Review the detail of the report and supporting documentation (knowing you are watching is a good deterrent to fraud) Perform trend analysis by tracking newer reports against prior periods Use professional collateral auditing firms in appropriate situations (i.e., larger facilitiesor early in a distressed situation) www.LendersConsulting.com

14. Field Examinations Survey Exams – LCG performs comprehensive independent exams on prospective borrowers or targeted investments in many different industries. Our examiners assess the prospect’s collateral, analyze trends, review systems and operations, review financial reporting, as well as several other targeted areas that assist our clients in making sound credit or investment decisions. Our goal is to provide our clients with a report that is tailored to their needs and relevant to each individual deal. Recurring Exams –LCG can accommodate our clients with quarterly, semi-annual, or annual exams. Often times, Account Executives are too busy to schedule recurring exams. We relieve that burden from our clients by preparing a detailed schedule of exams that is approved by all parties involved. Once on site, our examiners will perform the necessary testing to ensure the client is fully aware of their customer’s collateral position and financial well being. The result is a thorough report that is provided in a timely manner. www.LendersConsulting.com

15. Lender Services Special Assets Divestitures/Consulting– LCG offers assistance to banks and commercial lenders in divesting non-performing or high risk accounts or portfolios. LCG will work with a borrower by recommending process and debt structure changes, creating a comprehensive financing memorandum, and soliciting new creditors; all while taking into account the interests of the existing lender. Through its industry contacts, LCG is likely to find a new home for even the most challenged credits. www.LendersConsulting.com