Access to capital in fleet lending is no longer decided by asset values, revenue growth or market share alone. In this Monitor podcast Q&A, Kirk Browning, Division President of Vehicle Fleet Financing at 1st Source Bank, discusses why financial transparency has become a form of currency for fleet operators seeking better terms, larger facilities and faster approvals. Browning walks through how the FASB’s ASC 842 accounting standard reshaped underwriting, what separates a review from an audit, and why he encourages operators to treat financial reporting as a business asset rather than a compliance requirement. The conversation has been edited for length and clarity.
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Rita Garwood: Hi, everyone. I’m Rita Garwood, editor in chief of Monitor. Joining me on the podcast today is Kirk Browning. Kirk is Division President, Vehicle Fleet Financing at 1st Source Bank. Kirk, welcome to the podcast. I’m excited to talk with you today.
Kirk Browning: Thank you very much. I’m pleased to be here, Rita.
Garwood: You’ve spent your entire career on the lending side of the fleet and transportation industry. What made you want to write about financial transparency specifically right now?
Browning: I think the last six years since 2020 have provided fleet operations and fleet operators some very large opportunities and challenges, some of them unprecedented. We’ve never seen them before and may never see them again, especially with acquiring fleet, operating fleet and cycling out of assets. For lenders, lending into a booming market is pretty easy, but analyzing risk through a downturn can be especially challenging. And this is where the financial transparency becomes a form of currency and a competitive advantage. In my opinion, business owners who have established a really long historical track record of trust and credibility have a distinct advantage over lenders who may not have considered that as important in the past, especially a booming time.
Garwood: In our audience we have people who work at banks, we have people who don’t work at banks. For listeners who are not bankers, what does a division president of vehicle fleet financing actually spend most of the week doing?
Browning: I’m sure that would depend on who you ask, but at my core I am a servant leader for my department and I manage a very talented team of relationship sales officers and most of my time is supporting them internally. One of the greatest rewards I have had in my career is watching the younger generation work with their clientele move into a trusted advisor status within the industries we serve and watch their clients Achieve Security, Build Wealth and Realize Their DreamsTM. That is the goal of our bank and the goal we all live by and the mantra we follow every day.
Garwood: Great. The article that we’re talking about today that you wrote says “access to capital is no longer determined solely by asset values, revenue growth or market share.” What has changed?
Browning: Asset values, revenue growth and market share are still very important factors. But fleet lending now requires a more comprehensive understanding of the risks in today’s markets and economic cycles and environment. Really, financial institutions don’t have unlimited access to capital, so naturally we will deploy the funds where we consider the risk and the returns acceptable and reasonable. So I don’t think it’s out of bounds to consider that consistent and timely financial reporting can be especially valuable and in lending credibility to customers who are seeking increased capacity and looking to grow in their respective markets.
Garwood: You list lease obligations, residual value assumptions, fleet utilization and covenant compliance as the new factors for underwriting. Which of these has caught the most operators off guard recently?
Browning: I think that the environment is constantly changing and one area that I feel caught a lot of operators off guard is the FASB accounting standard ASC 842 that went into effect for private businesses on January of 22. Prior to this change, companies were and lenders were mostly focused on debt obligations. But ASC — or ASC 842 — brought the existing lease commitments onto the balance sheets as lease liabilities and right of use assets, creating a much sharper focus on traditional credit metrics like leverage, debt service coverage, EBITDA. Adjustments were required to compare the periods and borrowers on a like basis, and also tangible net worth. So many of the lending institutions, especially banks, had to adjust for those changes to report, or to analyze it correctly.
Garwood: In addition to FASB, all of these changes, do you see this shift as being driven more by lenders tightening their standards in response to regulations like this, or by the operators themselves getting more sophisticated?
Browning: Truly, I don’t think it was driven by lenders or operators. The shift — ASC 842 — was really driven by the Financial Accounting Standards Board. They felt that increasing the transparency and financial reporting was necessary because previously under the old standard, companies could have substantial lease obligations that were largely invisible on the balance sheet, making it especially difficult for investors and lenders to fully assess leverage and financial risk.
Garwood: Can you walk us through a real example? And it can be anonymous if it has to be, if you don’t want to names of a fleet that won better terms purely because of the quality of its reporting and not its size or rate of growth.
Browning: I’ve seen many situations where two very similar businesses as far as fleet sizes, revenue, profitability, etc. where the financial reporting or the quality of the financial reporting was a key factor in receiving quicker approval and better terms and sometimes pricing. For example, company A, who provides monthly company prepared financial statements, a year end review or audit, detailed fleet reporting and clear explanations of any material changes, had a distinct advantage over company B, whose financial reporting and operational stats were inconsistent, providing less detailed information and requiring a lot of additional work internally for questions and follow up.
Therefore, company A, with the greater transparency and a higher degree of lender confidence that it instilled, was granted a much larger credit facility, lower rates for a specific collateral class that they were interested in developing, and the approval sailed through the approval process internally, putting them at a distinct competitive advantage. But remember, better financial reporting doesn’t always translate to lower rates, but it can absolutely make a difference in flexibility, increased capacity and speed of approval.
Garwood: Makes sense. Let’s talk about the mechanics a bit. You mentioned that ASC 842 moved most leases onto the balance sheet in plain terms. Why does that matter so much for fleet heavy businesses specifically?
Browning: Prior to the change, fleet operators could have potentially millions of dollars of future lease commitments with no corresponding liability on its balance sheet. This forced internal credit analysts to manually review footnotes and estimate the lease debt on their own. This is not always ideal because it wasn’t giving maybe the true picture, and taking the time to dive deep into it with the owners obviously took more time. ASC 842 required leases — to our lessees, I should say — to record their leases of 12 months or longer on the balance sheet as a right of use asset and at least liability. That would increase the reported liabilities, which subsequently impacted leverage ratios, debt to equity metrics and other covenant calculations. And lenders had to adjust for these because it was mostly a presentation change.
But it did help more accurately depict the overall financial picture for the business.
Garwood: In your article you mentioned that financial reporting is often the single largest technical area separating a $25,000 to $50,000 review from $100,000 audit. Why does the type of financial reporting drive that much of a cost difference?
Browning: A review and an audit have fundamentally different objectives. A review provides limited assurances for lenders. The CPA does not test transactions, confirm balances with third parties, or obtain a level of evidence required in an audit. The conclusion is typically the accountant basically is saying that they’re not aware of any material modifications that should be made to the financial statement. The difference with an audit — an audit provides reasonable assurance, not total, but reasonable assurance that the financial statements are free from any material misstatement, whether it’s caused by error or fraud. And to support that, the auditor performs extensive testing on many areas of the business, including transactions and account balances, confirming information with third parties, banks, customers, lenders, et cetera, evaluating internal controls, reviewing supporting documentation, and really assessing accounting estimates and judgments.
At the end of the day, the auditor issuing an audit opinion stating whether the financial statements are fairly represented and in accordance with account the Generally Accepted Accounting Standards, which is GAAP.
Garwood: Can you walk us through the ladder of financial reporting? I know you did this in the article, but for those who have not read that yet, I think it would be good to hear it from you. Most companies start off with internally prepared reports and then they move up the rung, up a rung until they get to the top. At what size or stage should a fleet operator start thinking about moving up a level?
Browning: That’s a great question, Rita. As you said, company prepared statements is where most people start, which basically is no assurances for lenders that the information is right. Management says it’s right. Compilation is the next level. Again, it’s no assurances, but a CPA only organizes it — a little bit more oversight maybe, but again, no assurances. A review is the next level, which provides limited assurances. And the CPA is basically stating he didn’t see anything materially wrong. An audit grants reasonable assurances of the accuracy presented because the CPA has gathered evidence and believes it to be fairly stated. The best advice to answer the second part of your question that I could offer is a fleet operator should increase a level of financial reporting well in advance to when it will be a requirement.
And obviously as fleets grow and expand in both number of units and locations in various states, that audit request is most likely going to come sooner than later. One example I could state is moving from a review to an audit is no small fee. Sometimes it will take a year or more, for a large fleet of thousands of units and multiple locations to move from a review to an audited statement. And it’s a lot of work for the operation or operator itself to correspond with the CPA firm performing the audit just to develop that relationship and cadence for the testing. I can say though that getting through the first year audit is difficult and probably the most expensive. But once you get that procedure down, it is usually much smoother and much less costly going forward.
Garwood: What is the biggest misconception that operators have about what a reviewed statement actually tells the lender versus what they assume it tells them?
Browning: Another great question, and I think the common misconception is that the reviewed statement, because it’s prepared by a CPA, it must be right. And that is a misnomer. Don’t get me wrong, a reviewed statement is beneficial, and it is really the first meaningful step up in the reliability in financial reporting for commercial lenders, as it does provide limited assurance that the CPA did notice anything materially wrong.
Garwood: Let’s talk about the audit a little bit. You’ve mentioned that it’s complicated to get set up and it costs more money, but I’m sure that you know there’s also a return on investment for that. In your article, you reframe the audit question from “what does it cost?” to “what does it unlock?” What is the most concrete example of that payoff that you’ve seen? Is it faster approval? Is it better rates? Do they get larger facilities? What are some things that audit can help the operator achieve?
Browning: I think definitely the most tangible is what you’ve just stated — faster approvals, sometimes lower rates, but definitely increased facilities. A company that is growing quickly has got to be able to explain why and the costs associated, that they’re not just growing to hit a target, but they’re growing responsibly and organically. That’s been a big problem for operators who have a targeted growth plan and manage to that, and it does not pay off in the long run because they’re not using the financial data to support that decision. I think really business owners who focus on the cost of an audit aren’t considering that lenders are focusing on the quality and reliability of the financial information to make those important credit decisions.
And I’ve seen borrowers gain access to financing structures and pricings that would not have been available to them with a lower level of financial reporting.
Garwood: For a mid sized fleet operator who might be on the fence about upgrading their financial reporting, what is the first practical step that you would tell them to take this quarter?
Browning: If a business operator has plans for some aggressive growth, now is the time to start the conversation with your CPA firm to make sure, number one, that they are able to perform that level of higher reporting, such as a review or an audit. And also, get with your financing partners to make sure you understand and your CPA firm understands what their underwriting standards are and what they’re looking at. And lastly, I think it’s important to make sure the internal accounting team is going to be able to provide the information that’s going to be required for that audit. Testing this all supports where the ultimate goal, where the business is ultimately heading as far as growth plans.
It also would help the business to really take a deep dive to align systems, policies and procedures and hopefully gain some automation before you actually need the capital. In other words, you’re preparing the road before you travel.
Garwood: It makes sense. Last question I have for you. Do you have any closing advice for an operator who might feel like financial reporting is just another compliance box to check?
Browning: Compliance prompts you to produce the statements, but the real value is in how those statements help you produce, run your day to day operations and grow your business. High quality financial reporting creates credibility and trust with lenders, investors, vendors and potential buyers, which is important to owners who will need that more robust information to make future business decisions and strategic decisions within their own marketplace. I’ve always noticed that the companies that tend to enjoy the most flexibility and the most access to capital are usually the ones that have invested in advance in quality financial reporting long before they actually need it. Bottom line is, rather than thinking of reporting as a box to check or just a business expense that’s lost revenue, I’d encourage operators to think of it as a business asset.
And the stronger and more reliable that your financial information is today, the more opportunities it can unlock for you for the future.
Garwood: Excellent advice. Kirk, thanks so much for being on the podcast and for talking through this topic with me. I’ve appreciated the conversation, and I hope that you and your colleagues from 1st Source will come back and join us again on the podcast sometime soon.
Browning: Absolutely. It’s always a pleasure, Rita. Thank you very much.
