Whether you're applying for a line of credit, an SBA loan, or taking outside equity, the diligence process has more in common than most owners expect. The person on the other side is trying to answer one question: how likely is it that this business can meet the obligation it's taking on?
Everything they ask for is in service of that. Knowing what they're testing lets you prepare the answer rather than react to the question.
Before anything analytical, they check that your P&L, balance sheet and cash flow statement reconcile to each other and to your bank statements and tax returns. Discrepancies here are the fastest way to lose credibility, because they raise a question about everything else.
This is worth checking yourself before you submit anything. Reconciled books are table stakes and are noticed only by their absence.
They'll look at concentration, contracted versus one-off revenue, and how long customers stay. A business with 60% of revenue in one client is a different risk from one with 200 customers, at identical revenue.
For lenders this is the whole exercise, usually expressed as debt service coverage — cash available to service debt, divided by the payments required. Most want 1.25× or better. Work yours out before you apply; if it's tight, you'll be asked to explain it, and having the explanation ready is much better than improvising.
Nobody believes a forecast. What they're testing is whether you understand your own business well enough to build one honestly.
A projection showing 40% growth with no explanation of what produces it is worse than no projection. It signals that the numbers came from a target rather than a model.
Projections built from drivers — capacity, pipeline, close rate, pricing — survive questioning. Projections built by adding a percentage do not.
This one catches people out. If you've forecast before, expect to be asked how it turned out. Being wrong is fine and expected. Being wrong without knowing why is the problem.
A lender is protecting against downside. They care about coverage, collateral, consistency, and your worst plausible quarter. Show stability.
An equity investor is buying upside. They care about the size of the opportunity, unit economics, and whether the business gets more profitable as it grows. Show the trajectory.
The same set of financials serves both, but the emphasis differs — and pitching a lender on growth potential tends to make them more nervous, not less.
Before you submit, ask yourself whether you'd lend to this business on these numbers. If you'd hesitate, work out precisely where — that's the question you'll be asked, and you have time to fix it now.