A bank due diligence checklist looks like the equity version and asks a different question. An equity buyer is examining upside; a lender is examining downside and whether cash covers interest in the worst case it is willing to imagine. That difference reorders the entire list, and a borrower who prepares for the equity questions and not the lender's is surprised late. This page sets out the four areas a lender concentrates on.
Cash conversion rather than profit
A lender is paid from cash, not from earnings, so working capital cycles, capital expenditure requirements and the seasonality of the receipts matter more than the growth story. A business with excellent margins and a long collection cycle is a harder credit than its profit suggests.
The downside case, and what breaks first
A lender models a bad year and asks what happens to the covenants. Which customer leaving would breach a leverage test, and how quickly costs could be taken out. Borrowers who bring their own downside case to the table are treated as better informed, which is worth real basis points.
Security: what the lender can actually take
What assets exist, whether they are already pledged, and what a realisation would produce. In a business whose value is people and contracts rather than plant, the honest answer is very little, which is why those businesses borrow against cash flow at different terms.
The structure, and where the debt sits
Which entity borrows, which entities guarantee, and what stands between the lender and the operating cash. An asset purchase changes this materially against a share purchase, and the allocation the parties agree and file affects the depreciation the borrower can claim against that cash.
Questions people ask about bank due diligence checklist
How does lender diligence differ from an equity buyer's?
A lender examines downside and cash coverage; an equity buyer examines upside. That reorders the whole list.
What matters most to a lender?
Cash conversion rather than profit, and what breaks first in a bad year. Covenants are tested against a downside case, not a plan.
Does structure matter to the debt?
Yes. Which entity borrows and what guarantees it decides how close the lender is to the operating cash.