What does lender due diligence cover on a business loan application?

What Lender Due Diligence Actually Covers

Once a lender issues a term sheet or conditional approval, formal due diligence begins. The scope varies by lender type and loan size, but the core components are consistent across most commercial lending transactions. UCC lien search: The lender searches the Uniform Commercial Code filing registry in the state(s) where the business operates and the owner is domiciled. This reveals any existing liens on business assets — equipment, receivables, inventory — that a prior lender filed under UCC Article 9. Existing blanket liens from prior funders are the most common due-diligence obstacle; they must be subordinated or paid off before a new senior lien can be perfected. OFAC screening: Every commercial lender is required to screen borrowers against the Office of Foreign Assets Control (OFAC) Specially Designated Nationals and Blocked Persons List, maintained by the U.S. Department of the Treasury. A business or owner name-matching an OFAC-listed entity stops the transaction entirely until resolved. IRS 4506-C tax transcript: As noted in SBA SOP 50 10, lenders obtain tax transcripts directly from the IRS to verify that presented financial statements match filed returns — this is the primary fraud-detection mechanism in business lending.

AR Aging, Vendor References, and Site Visits

For loans above $250,000 or for businesses where receivables are pledged as collateral, lenders typically request an accounts receivable aging report — a breakdown of outstanding invoices by age bucket (0–30, 31–60, 61–90, 90+ days). Lenders use this to assess the quality of the receivable base: a concentration of 90+ day receivables signals collection problems, customer concentration risk, or dispute exposure. Vendor and customer references are common for SBA loans and larger conventional deals — particularly for acquisition financing or franchise deals where the cash flow quality of a specific relationship matters. Site visits (in-person or virtual) are required for most SBA 7(a) loans above $500,000 and for equipment loans where collateral must be physically verified. For smaller alternative term loans and MCAs, site visits are rare — underwriting is primarily data-driven from bank statements and bureau checks.

Typical Timeline and How to Compress It

Full due diligence on a commercial term loan typically runs 5–15 business days from receipt of complete documents. The two biggest timeline drivers: (1) IRS 4506-C transcript turnaround — the IRS processes transcript requests in 3–7 business days under normal conditions; (2) borrower document delays — incomplete AR aging reports, missing entity documents, or unsigned financial statements stall the process at the borrower's end, not the lender's. What to prepare before the lender asks: Clean up UCC searches yourself in advance (your secretary of state's UCC search portal is public); gather two years of tax returns plus an IRS 4506-C authorization form; prepare a current AR aging report; identify two customer or vendor references who can be reached quickly.