The Other Side of Due Diligence

Anyone in or around the banking/lending business knows all about due diligence. Every firm may have their own spin to it, but most lenders’ due diligence processes are fairly similar. There is a field exam, to include financial analysis, searches of the business in question, background checks on the relevant ownership/management, appraisals, underwriting, etc. But what about the borrower? What due diligence should they do on their soon-to-be lender? Let’s take a look.

These days, companies have numerous options from whom to borrow money for non-real estate business loans. You have traditional banks, SBA products, bank owned asset-based lenders, independent asset-based lenders, factors, mezzanine debt, private equity, etc. If you are a borrower and looking for a means to finance yourself, a referral is a good place to start.  But even if referred, how do you know the lender is the right fit for you?

The borrower should perform their own due diligence on the lender. The borrower can easily ask the referring party about the lender, but should also ask the lender to provide references of past and present clients they can speak with. Also, they can check with their CPA and/or attorney to see if either has had any dealings with the lender. Other business professionals the borrower uses may be good resources as well.

When speaking with a past or present client of the lender, some of the most important questions the borrower should ask include:

How would you characterize your relationship with the lender?  Good, bad, or indifferent? Are you treated well by the staff of the lender? Is the lender empathetic when problems arise? Have you been through a difficult time in your business while with this lender? How does the lender behave when times are tough? Are they supportive or do they show you the door?

Did the lender’s actions meet your expectations based on what you were told up front?  Were you told things would operate a certain way, only to find they are more onerous later? Did they deliver on promises made?

Was the lender’s initial proposal changed before the deal was finalized?  Were any changes to the structure of your loan or the pricing changed between the proposal and the closing? Were the changes justified? Did you feel like their proposal was designed to stop you from shopping with other lenders, and then they changed things on you later (bait and switch)?

Did the lender freely provide you a list of references or did you have to drag it out of them?  Did they offer it, or did you have to ask? Did they have one prepared, or did they have to hurriedly make one up?

How long has the lender been in business?  Are they new at this or are they experienced at getting deals done?

Have they lent to companies in your industry?  Do they understand the issues you face, or is it new to them?

Does the lender have covenants?  Does the lender impose loan covenants, or do they let you freely operate your business as you see fit? Do they restrict remuneration by the ownership?

Does the lender have the capacity to expand your line of credit if needed?  What is the lender’s maximum loan size? What do they do if you need more than their maximum?

Have you met the decision makers at the lender?  Who makes the final credit decision on your loan or changes to it? Is that person(s) involved early in the process or not? Can you speak with a decision maker up-front and on-going?

Is the lender’s staff stable or frequently changing?  Is there consistency with handling your loan? Are you constantly “training” a new loan officer?

How are the lender’s reporting requirements?  Is it what you were told up-front? Is it reasonable based on the market segment the lender operates in?

Asking these, or other, questions deemed important by the borrower can shed light on the lender and lead the borrower towards a lender that will be the best fit for them. A good borrower-lender relationship is like any other; it has to work both ways. Doing a little due diligence on the lender may save the borrower frustration downstream and ensure a win-win.