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At some point when running a business, you may need financing to fund your next stage of growth, get out of a cash crunch or complete a project. It’s not automatic that you will secure this funding. The lender needs to be sure that you are able to service the loan.
When you apply for a business loan, you will go through a due diligence process designed to evaluate your capacity to repay the loan.
At PSA Capital Investments, we conduct rigorous loan due diligence to ensure responsible lending to borrowers and protect investor capital. Let’s walk through what happens during a due diligence process and how to prepare for it.
What Is Loan Due Diligence
Loan due diligence is the process of investigating, analysing and evaluating various aspects of a business involved in a loan transaction.
The lender assesses the creditworthiness of the borrower, identifies potential risks and verifies information submitted in the loan application. While loan due diligence focuses primarily on financial aspects such as credit history and financial statements, it may also include a legal compliance review and market analysis.
But every business and circumstance is different so the exact nature and depth of a due diligence process will vary.
What Does Commercial Loan Due Diligence Involve?
Here are some of the things that a commercial loan due diligence process covers:
Credit History Analysis
Similar to a traditional bank, private lenders will do a business and personal credit history check to assess the borrower’s creditworthiness. The lender analyses your borrowing and repayment history to get an idea of the level of risk they are facing.
A credit history analysis also includes checking whether you have any current loans since that determines whether you have the capacity for additional financing.
Business Performance Review
You may be having temporary cashflow issues, so we take into account the full picture of your business and the profitability of your operations as a whole. We do this by reviewing business financial statements such as the balance sheet, profit and loss statement and cash flow statement.
They give the lender a clear picture of the health and performance of your business, which factors heavily in deciding whether to approve financing.
A business performance review also includes an analysis of past financial statements. They provide a performance track record, which indicates consistency of cash flow, profitability and any seasonality in revenue. They are also useful in making future financial projections.
Collateral Valuation
Collateral is a safety net for lenders in the event of a loan default, so it’s important to make sure that the value of the collateral can cover the loan amount in the event that recovery measures are needed.
Collateral valuation involves estimating the value of assets such as real estate property, equipment or intellectual property that have been put up as collateral. Valuation is typically done by third-party professionals to ensure an accurate and fair figure based on the prevailing market price.
Market and Competitive Analysis
Loan due diligence may also include an analysis of the market and competitive landscape. A borrower’s capacity to repay a loan is directly tied to the performance of their business, meaning the lender needs to understand potential market and industry risks that could affect cash flow and profitability.
This includes a change in the competitive landscape, regulatory changes, shifts in demand and economic downturns. For example, if economic experts are predicting a recession, that could affect demand and revenue, potentially affecting a business’s ability to maintain loan repayments.
Legal and Regulatory Compliance Check
As we mentioned, due diligence goes beyond financial checks and number-crunching to include other aspects of the business. For example, many due diligence processes involve carrying out legal and regulatory compliance checks.
Failure to adhere to legal and regulatory requirements can attract fines, criminal liability and reputational damage, all of which can affect a business’s capacity to repay a loan.
Making sure that a business has all the necessary licenses to operate, complies with labour laws and adheres to industry regulations is an important part of risk evaluation.
What To Expect During a Loan Due Diligence Process
One of the most common questions borrowers have is how long the loan due diligence process takes.
This varies depending on the type and complexity of the industry, the type and size of the business and the value of the loan transaction. Due diligence is generally an exhaustive and meticulous process; it could take anywhere from 15-30 days to a couple of months.
Some of the things to expect include submitting a lot of documents for review, fielding multiple information requests, welcoming on-site visits and significant financial scrutiny. To make the process smoother, it’s a good idea to gather and organise your business financial statements, business operational records and tax documentation.
How PSA Capital Investments Helps Businesses Recover
At PSA, we pride ourselves on our strict adherence to ethical lending. Our goal is to help businesses recover and grow, not keep them in debt. That’s why we offer affordable loans with fair lending terms that allow businesses to make repayments on time and exit as soon as possible. By helping businesses recover and repay their loans, we also ensure investors get high yields, with returns averaging over 8% per annum.
Ready to borrow funds or invest with us? Contact us on 03 9847 7516 to talk to an expert today.
Disclaimer: The information contained in this document is of a general nature only and has been prepared without taking into account your objectives, financial situation or needs.
