Finance term
Due Diligence
Also known as: DD, loan underwriting review
Definition
Due diligence is the structured investigation phase of a lending, acquisition, or investment transaction. Lender due diligence covers financial statements, tax returns, debt verification, lien searches, and site visits. Borrower due diligence means reviewing loan terms, lender reputation, contract clauses, and prepayment provisions before signing.
Detailed explanation
In lending, due diligence is the lender's process of verifying that the business is what the borrower says it is and that the financials support the loan. Standard lender DD items include: 2–3 years of business and personal tax returns, year-to-date P&L and balance sheet, 3–6 months of business bank statements, existing debt schedule, collateral appraisals, lien searches (UCC, judgment, tax lien), and — for larger loans — an on-site visit or field exam.
From the borrower's side, due diligence means doing your homework on the loan before signing. Read the full loan agreement — not just the summary terms. Verify the APR, all fees (origination, documentation, servicing), prepayment provisions, default triggers, and confession-of-judgment or UCC lien clauses. For MCAs, the full payback amount and holdback percentage matter as much as the advance amount.
In M&A due diligence, the process is more comprehensive: legal (contracts, IP, litigation), financial (audited statements, normalized EBITDA), operational (key-employee dependencies, systems, customer concentration), and tax (exposure, deferred liabilities). A thorough DD process protects both buyers and lenders from undisclosed liabilities.
The SBA SOP 50 10 (https://www.sba.gov/document/sop-50-10-lender-development-company-loan-programs) specifies the exact due-diligence documentation requirements for SBA 7(a) and 504 lenders. The FDIC's bank examination manual (https://www.fdic.gov/regulations/applications/financial-institution-letters/guidance.html) details commercial-loan underwriting due-diligence standards for federally insured institutions.
◈ Worked example
- SBA 7(a) lender due diligence checklist: 3 years personal and business tax returns, business license, articles of incorporation, 90 days bank statements, list of all existing debts, appraisal of collateral, personal financial statement.
- MCA borrower due diligence: verify the factor rate, total payback amount, holdback percentage, and daily/weekly ACH amount. Confirm there are no additional fees not disclosed in the contract. Calculate APR-equivalent to compare against term-loan alternatives.
- M&A due diligence for an acquisition: buyer reviews 3 years of audited financials, customer contract terms, supplier agreements, employee contracts, IP assignments, pending litigation, and tax filings. Typically takes 30–60 days.
Common questions
The most-asked questions about Due Diligence — answered straightforwardly.
What documents does a lender typically request during due diligence? +
Standard package for most business loans: 2–3 years business tax returns, 2–3 years personal tax returns (for all 20%+ owners), year-to-date P&L and balance sheet, 3–6 months business bank statements, debt schedule (existing loans + monthly payments), personal financial statement, business license, and articles of incorporation. SBA loans, real estate loans, and equipment loans typically require additional docs.
How long does lender due diligence take? +
It varies by loan type and lender. Online lenders / MCAs: 24–72 hours. Conventional bank term loans: 2–4 weeks. SBA 7(a) loans: 30–90 days depending on lender type (SBA Preferred Lenders process fastest). Equipment finance: 3–10 days. The more complex the deal and the larger the loan, the longer the process.
What is a lien search in the context of due diligence? +
A lien search (UCC search, judgment lien search, tax lien search) checks whether the borrower or collateral has existing claims against it. If a previous lender has a blanket UCC lien on all business assets, a new lender may be in second position — which affects their security and willingness to lend. Lenders typically conduct lien searches at the Secretary of State level for UCC filings.
Further reading
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