Under a field warehousing arrangement, a finance company (usually one that specializes in this type of arrangement) will segregate a portion of a company’s warehouse area with a fence. All inventory within it is collateral for a loan from the finance company to the company. The finance company will pay for more raw materials as they are needed, and is paid back directly from accounts receivable as soon as customer payments are received. If a strict inventory control system is in place, the finance company will also employ someone who will record all additions to and withdrawals from the secured warehouse. If not, then the company will be required to frequently count all items within the secure area and report this information back to the finance company. If the level of inventory drops below the amount of the loan, then the company must pay back the finance company the difference between the outstanding loan amount and the total inventory valuation. The company is also required under state lien laws to post signs around the secured area, stating that a lien is in place on its contents.
Field warehousing is highly transaction intensive, especially when the finance company employs an on-site warehouse clerk, and so is a very expensive way to obtain funds. This approach is only recommended for those companies that have exhausted all other less-expensive forms of financing. However, lenders typically do not require any covenants in association with these loans, giving corporate management more control over company operations.