Preparing for Lender Due Diligence: A Practical Overview

Feb 24, 2026 Oakmead Insights

Preparing for Lender Due Diligence: A Practical Overview

Lender due diligence is a critical phase in most debt-raising processes, yet it is frequently underestimated by borrowers. In practice, the level of preparation brought to this stage can materially influence execution speed, deal certainty and ultimately the terms on which funding is secured.

A clear understanding of lender expectations and proactive alignment with those expectations can significantly reduce process friction and mitigate execution risk.

At its core, lender due diligence is designed to provide independent validation of the borrower's investment case. It is not purely a backward-looking financial review; rather, it is a forward looking assessment of risk, sustainability and resilience.

Lenders typically seek to establish:

Sustainability of cashflow
Quality and robustness of earnings
Visibility of future trading
Identification of key risks
Alignment with the proposed financing structure

The conclusions drawn during this phase directly inform credit decisions, covenant design, pricing and overall facility sizing.

While scope varies by transaction, lenders consistently focus on several core areas.

Financial Performance and Earnings Quality

Lenders undertake detailed analysis of historic performance, with particular scrutiny on:

Revenue composition and reliability
Margin sustainability
Growth drivers and their durability
EBITDA normalisation and adjustments

Adjustments are a primary focus, particularly in acquisition scenarios, and must be credible, well-supported and demonstrably non-recurring.

Cashflow and Working Capital Dynamics

Given that debt is serviced from cash, lenders will focus heavily on:

Cash conversion from EBITDA
Working capital cycles, seasonality and volatility
Structural vs growth-related working capital requirements

This analysis often moves beyond EBITDA to a cash-based view of performance (e.g. CFADS), helping lenders assess true repayment capacity under both base case and downside scenarios.

Commercial and Counterparty Risk

Lenders will assess:

Customer concentration and exposure
Supplier dependencies
Contract terms, duration and enforceability
Revenue mix (contracted vs transactional)

This informs their view on revenue visibility and downside resilience.

Management and Governance

The quality of management is a critical underwriting consideration, including:

Depth and experience of the team
Track record of delivery
Financial controls and reporting capability
Governance frameworks

A credible management team with robust reporting processes can significantly enhance lender confidence.

While lenders do not expect a "perfect" business, certain issues consistently attract scrutiny and can materially affect outcomes if not addressed early.

Earnings and cashflow concerns

Aggressive or unsupported EBITDA adjustments
Weak cash conversion relative to reported earnings
High capital expenditure or working capital requirements reducing effective cashflow

These issues typically result in reduced debt capacity, as lenders focus on cash (not accounting profit) when assessing serviceability.

Revenue and model risk

High customer concentration or reliance on key counterparties
Limited contractual protection or short-term revenue visibility
Exposure to cyclical or discretionary markets

These factors increase perceived volatility and lead to more conservative underwriting assumptions.

Operational and margin risks

Volatile or declining margins
Limited pricing power or exposure to input cost inflation
Operational inefficiencies or inconsistent cost control

Margin compression directly impacts debt service capacity under stress scenarios.

Working capital and liquidity issues

Significant working capital volatility or seasonality
Long cash conversion cycles
Limited liquidity headroom

Often leads to requirements for additional facilities (e.g. RCF or ABL) or lower leverage.

Forecast and credibility issues

Overly optimistic projections without clear justification
Weak linkage between operational drivers and financial outputs
Inconsistencies between management narrative and financial data

Credibility is critical, confidence in forecasts often underpins lender appetite more than the headline numbers.

Structural and governance risks

Key person dependency
Weak financial controls or reporting systems
Contractual risks (e.g. change-of-control clauses)
Legal or regulatory exposures

These risks may not prevent funding, but typically result in tighter covenants or structural protections.

Where these issues emerge late in the process, the impact can be significant:

Delays to credit approval
Erosion of lender confidence
Repricing or restructuring of terms
Reduced facility sizes or increased equity requirements

In competitive or time-sensitive transactions, such outcomes can be decisive.

Effective preparation requires a disciplined and proactive approach:

Robust, lender-aligned financial modelling
Early red-flag identification and framing
Clear and consistent equity narrative
Well-supported and realistic assumptions
Downside and sensitivity analysis demonstrating resilience

Addressing issues proactively allows borrowers to retain control of the narrative and avoid reactive renegotiation.

Experienced advisers play a key role in managing lender due diligence effectively:

Anticipating and pre-empting lender concerns
Presenting information clearly and credibly
Coordinating diligence workstreams across stakeholders
Managing lender dialogue and maintaining momentum
Mitigating execution risk throughout the process

Strong advisory support can materially improve both the efficiency and certainty of outcome.

Lender due diligence is a fundamental component of the credit process, shaping both availability and terms of funding. Outcomes are driven not only by underlying business quality, but by how effectively that quality is evidenced, communicated and stress-tested.

Businesses that approach due diligence with preparation, transparency and a clear understanding of lender priorities are significantly better positioned to secure efficient execution and optimal financing outcomes.

For transaction-specific considerations, please refer to our Business Acquisition Finance and Growth & Investment Funding pages.

Preparing for Lender Due Diligence