What is Due Diligence?
Learn what due diligence means in business financing, understand what lenders investigate during underwriting, and know what you should review before accepting a loan.
Due diligence is the investigation and analysis performed before completing a business transaction. In business financing, due diligence happens on both sides — lenders investigate borrowers before approving loans, and savvy borrowers should investigate lenders before accepting financing.
Lender Due Diligence
When you apply for a loan, lenders conduct due diligence to assess risk:
- Financial review: Analyzing tax returns, financial statements, and bank statements
- Credit analysis: Checking personal and business credit reports
- Business verification: Confirming your business exists and operates as stated
- Collateral assessment: Evaluating assets pledged as security
- Legal review: Checking for liens, judgments, or legal issues
- Industry analysis: Evaluating risks specific to your industry
- Management evaluation: Assessing the experience and capability of owners
Documentation Typically Requested
Be prepared to provide:
- Personal and business tax returns (2-3 years)
- Profit and loss statements and balance sheets
- Bank statements (3-6 months)
- Accounts receivable and payable aging
- Business licenses and legal documents
- Lease agreements
- Existing debt schedule
- Business plan (for larger or SBA loans)
Borrower Due Diligence
You should also conduct due diligence on potential lenders:
- Total cost: Calculate the true APR, including all fees
- Terms review: Understand payment frequency, prepayment penalties, and covenants
- Reputation: Research the lender through reviews, BBB, and industry sources
- Hidden clauses: Look for confession of judgment, blanket liens, or other concerning terms
- Customer service: Assess responsiveness and professionalism during the application
Compare Multiple Offers
Always compare at least 2-3 financing offers. Lenders know informed borrowers shop around, and competition often leads to better terms.
Due Diligence for Business Acquisitions
If you are buying a business with loan proceeds, additional due diligence is required:
- Verify seller's financial claims with independent records
- Review customer and vendor contracts
- Assess employee and payroll obligations
- Check for pending litigation or claims
- Evaluate equipment condition and value
- Confirm intellectual property ownership
Timeline Expectations
Due diligence takes time:
- Online lenders: 1-7 days for simplified underwriting
- Bank term loans: 2-6 weeks for full due diligence
- SBA loans: 30-90 days including SBA review
- Acquisition financing: 60-120 days with business due diligence
Prepare your documents before starting the application process. Having organized, complete documentation speeds up due diligence and demonstrates professionalism to lenders.
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Read more →Important Disclosure
Not Financial Advice: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. You should consult with qualified professionals before making any financial decisions.
No Guarantee of Financing: Liminal Lending Co. is a business loan marketplace that connects borrowers with third-party lenders. We are not a lender and do not make credit decisions. Submitting an application does not guarantee approval or funding. Loan terms, rates, and availability vary by lender and are subject to borrower qualifications and lender criteria.
Third-Party Lenders: All loan products are offered by independent third-party lenders. Liminal Lending Co. is an Independent Sales Organization (ISO) and receives compensation from lenders for successful referrals. Terms and conditions of any loan are between you and the lender.
Rate Information: Rates, terms, and fees mentioned in this article are estimates based on publicly available information and may not reflect current market conditions or specific lender offers. Actual rates depend on creditworthiness, business financials, and lender policies.
Information May Change: Financial markets, lending regulations, and economic conditions are subject to rapid change. While we strive to keep our content accurate and up-to-date, information in this article may become outdated. Always verify current rates, terms, program availability, and regulatory requirements with lenders and official sources before making financial decisions.