Compliance and Operational Environments

Excerpted from "What Every Lender Needs to Know About Working Capital Lending"

Regulations set the stage. An operational environment for a working capital lending program has to work on that regulatory stage. The procedures that a lender provides to its working capital lending program should provide "compliance" fences that keep the lending program constantly on the regulatory stage.

The lender's operating system must help automate all lender procedures. Automating the procedures is a key step in ensuring that regulatory compliance will occur. Controls within that operational environment should be provided by the business rules that are set relative to each and every borrower individually. Additionally, the lender should set operational or compliance procedures relative to its internal lending culture — its credit culture. The procedures in the credit culture naturally keep the lender in regulatory compliance.


By a lender having visibility into each and every aspect of the compliance environment created by the procedures and the business rules, they will be able to eliminate much of the internal control risk for working capital loans. Visibility helps to identify weaknesses. It also allows for adjustments to each and every situation. Most importantly, having clear visibility eliminates "gotchas".

"Gotchas" are transactions that come through that on the surface look regulatory compliant, but in reality turn out to be noncompliant. An example of this might be a fraudulent receivable. Consider the following scenario:


By having clear visibility into a compliance environment that establishes pre-funding validation and verification of the receivable as part of the business rules, that particular business rule would identify and verify that this receivable was indeed fraudulent, and this receivable would be immediately removed from the borrowing base prior to the funding.

If, however, the same lender were operating in an operational system environment that did not allow for pre-funding verification or validation and did not have built in business rules, the fraudulent invoice would not only become part of the borrowing base, but would probably not be discovered for many, many months, if at all. The invoice would, however, sit in the batch as part of the overall borrowing base.


The business rules and procedures inside the operational environment protect the lender and keep the working capital loan in compliance with the regulations and the working capital compliance environment requirements. By establishing a compliant and visible operational environment, working capital loans are feasible and can provide that much needed cash to a business.