Preparing for Lender Due Diligence: A Practical Guide for SME Owners

Feb 24, 2026 Oakmead Insights

Preparing for Lender Due Diligence: A Practical Guide for SME Owners

Many SME funding processes encounter problems long before a lender reaches a formal credit decision.

Not because the business is unsuitable for funding, but because management underestimate the importance of lender due diligence.

Missing information, weak forecasts, unexplained EBITDA adjustments or poor cash conversion can quickly reduce lender confidence. The result is often delays, increased scrutiny, lower facility sizes or less favourable terms.

The good news is that most of these issues can be identified and addressed before approaching lenders.

Whether you are raising a term loan, asset based lending facility, invoice finance line or funding from an alternative lender, good preparation can significantly improve both the speed and outcome of the process.

Before approaching the market, make sure you have:

1. Historical Accounts

Statutory accounts covering at least the last three to four financial periods.

2. Latest Year End Information

Draft accounts or a current Profit & Loss and Balance Sheet if your latest year end accounts have not yet been finalised.

3. Up to Date Management Accounts

Current management accounts including both a Profit & Loss account and Balance Sheet.

4. A Credible Financial Forecast

Ideally a fully integrated forecast containing Profit & Loss, Balance Sheet and Cashflow projections covering at least three to five years.

5. A Clear Funding Rationale

A concise explanation covering:

What the business does
Why funding is required
How the funds will be used
How the debt will be repaid

Depending on the funding product, lenders may require additional information. For example, invoice finance providers will typically request aged debtor and aged creditor reports.

However, the information above is normally sufficient for lenders to undertake initial underwriting and determine whether a proposal fits their lending criteria.

Many business owners assume due diligence is simply a compliance exercise.

In reality, lenders are trying to answer a much more important question:

Can this business reliably repay the debt throughout the life of the facility?

This involves both a historical assessment and a forward looking assessment.

Firstly, lenders assess how much debt the business can support based on historical performance.

They then evaluate whether future cashflow is likely to support ongoing repayments under a range of scenarios.

Ultimately, lenders are assessing risk.

They want confidence that:

Cashflow can support repayments
Earnings are sustainable
Forecasts are realistic
Management understand the risks facing the business
The proposed funding structure is appropriate

The conclusions they reach will influence:

Whether funding is approved
How much funding is available
The interest rate
Security requirements
Financial covenants
Reporting requirements

1. Earnings Quality and Financial Performance

Lenders are not simply interested in how much profit you generate.

They are interested in how sustainable that profit is.

Typical questions include:

Is revenue recurring, contracted or generated from repeat customers?
How stable are gross margins?
Has profitability been affected by pricing pressure, wage inflation or rising costs?
Are EBITDA adjustments genuinely one off in nature?

Many SME owners underestimate how closely lenders scrutinise EBITDA adjustments.

If management add back costs relating to legal disputes, restructurings, exceptional management costs or unusual projects, lenders will usually ask for evidence supporting each adjustment.

Lenders gain confidence when management can explain adjustments clearly and provide supporting evidence.

2. Cashflow and Working Capital

Debt is repaid from cash, not accounting profits.

For this reason, lenders often spend as much time analysing working capital as they do reviewing the Profit & Loss account.

They will want to understand:

How much EBITDA converts into cash
Trends in debtor, creditor and stock days
Seasonal cashflow fluctuations
Working capital requirements associated with growth

Example

A business generates £300,000 of EBITDA from £2 million of turnover.

On paper, this appears attractive.

However, if debtor days increase from 45 days to 80 days, an increasing proportion of profit becomes trapped in working capital.

Whilst the business remains profitable, the cash available for debt repayment may be significantly lower than expected.

This is exactly the type of issue lenders focus on during underwriting.

3. Customer and Supplier Risk

One of the quickest ways to increase lender concern is excessive concentration risk.

Lenders typically assess:

Revenue contribution from major customers
Contractual visibility
Customer retention trends
Supplier dependency

Common questions include:

How much revenue comes from your largest three to five customers?
Are revenues contracted?
How easy would it be to replace a key supplier?
What happens if your largest customer leaves?

A business generating 40% of revenue from a single customer may still be fundable, but lenders will almost certainly factor that risk into their assessment and structure the facility more conservatively.

4. Management Capability and Governance

Particularly within owner managed businesses, lenders often back management teams as much as they back financial performance.

They want to understand:

How dependent the business is on the owner
Whether there is a capable management team beneath the founder
The quality of financial reporting
Succession planning arrangements

One common question lenders ask is:

What happens if you are unavailable for six months?

Businesses with a credible answer to that question typically inspire significantly greater lender confidence.

In my experience, funding applications are rarely declined because a business has encountered challenges.

More often, lenders become uncomfortable when management cannot adequately explain them.

Red Flag	What It Tells a Lender	Potential Outcome
Aggressive EBITDA adjustments	Underlying profitability may be weaker than presented	Reduced facility size or increased scrutiny
Weak cash conversion	Repayment capacity may be lower than profits suggest	Lower lending levels and tighter covenants
High customer concentration	Revenue may be vulnerable	More conservative lending terms or additional security
Unsupported forecasts	Future performance assumptions may not be credible	Delays and reduced confidence
Key person dependency	Business risk sits with one individual	Requests for succession planning or key person insurance
Weak financial reporting	Numbers may not be reliable	Longer underwriting process and increased reporting requirements

None of these issues necessarily prevent funding.

However, businesses that identify and address them early are usually able to control the narrative rather than react defensively during the lender review process.

The most successful borrowers assess their business through a lender's eyes before approaching the market.

Here is a practical framework.

1. Make Your Numbers Lender Ready

Forecasts should clearly link back to operational drivers.

Lenders want to understand the assumptions supporting revenue growth, margins and cashflow performance.

The more transparent the model, the easier it is to build confidence.

2. Identify Potential Concerns Early

Review:

Customer concentration
Margin trends
Working capital performance
Cash conversion
Management dependency

It is far better for you to identify potential concerns than for a lender to discover them during due diligence.

3. Build Downside Scenarios

A lender is unlikely to rely solely on management's best case forecast.

Stress test your projections.

For example:

Revenue falls by 10% to 20%
A key customer is lost
Margins reduce
Debtor days increase

Demonstrating resilience under pressure can materially strengthen lender confidence.

4. Ensure Your Story Is Consistent

One of the quickest ways to lose credibility is inconsistency.

Your financial performance, business strategy and forecast assumptions should all support the same narrative.

Small inconsistencies often generate a disproportionate amount of lender scrutiny.

5. Invest in High Quality Reporting

Timely and accurate management information signals that management understand the business and remain in control of performance.

Good reporting often accelerates the lending process.

Not every debt raise requires external support.

For straightforward facilities with an existing lender, management may be perfectly capable of managing the process themselves.

However, specialist support can add considerable value where funding requirements are larger or more complex.

A good adviser can help:

Identify and address lender concerns before they become issues
Improve the quality and credibility of financial forecasts
Present information in a lender friendly format
Access a wider funding market
Run a competitive funding process
Maintain momentum and manage lender requests

In many cases, the value comes not from finding a lender, but from improving the quality of the opportunity before it reaches one.

1. How Long Does Lender Due Diligence Take?

For most SME transactions, lender due diligence typically takes anywhere from a few weeks to a couple of months, depending on the complexity of the facility and the quality of information available.

2. What Documents Will Lenders Request?

Typically:

Historical accounts
Current management accounts
Integrated financial forecasts
Customer and supplier information
Corporate structure details
Information regarding management and governance

3. Do Lenders Expect a Perfect Business?

No.

Lenders regularly support businesses with challenges.

What matters is that risks are understood, quantified and sensibly managed.

4. What Is the Biggest Mistake SME Owners Make?

Allowing the lender to discover concerns before management have addressed them.

A weakness that has been identified, quantified and mitigated is significantly less problematic than one uncovered unexpectedly during due diligence.

Having worked with both lenders and SME borrowers, I have found that due diligence rarely causes a deal to fail overnight.

More often, lender confidence gradually erodes.

An unsupported forecast. An unexplained EBITDA adjustment. A working capital issue that has not been properly addressed.

Individually these issues may appear minor. Collectively they create uncertainty.

The businesses that achieve the best funding outcomes are not always those with the strongest financial performance.

They are the businesses that understand their numbers, acknowledge their risks and provide lenders with confidence that management is firmly in control.

Good preparation cannot guarantee funding, but it can materially improve lender confidence, increase funding options and help secure more competitive terms.

Before approaching lenders, ask yourself:

✓ Are my management accounts fully up to date?
✓ Can I clearly explain how my forecast has been built?
✓ Have I stress tested the business under downside scenarios?
✓ Have I identified the key risks a lender is likely to focus on?
✓ Can I justify every EBITDA adjustment?
✓ Does the proposed funding structure fit my business's cashflow profile?

If the answer to any of these questions is no, it may be worth reviewing your lender readiness before entering the market.

If you are considering a debt raise, acquisition finance, refinance or working capital facility and would like an independent view on lender readiness, feel free to get in touch.

Preparing for Lender Due Diligence