What is business diligence?

Business diligence is the process of vetting borrowers to make sure that their company financials, processes, and business history all fit the requirements of the capital provider.

When companies go to capital providers to access debt capital, they're sometimes surprised to learn that they have to provide more information than just their company financials.

Debt capital providers want to know that their investments will be repaid, of course, but they also want to make sure that they understand the borrower's business history, standard operating procedures, and business model.

Over the course of the debt capital due diligence process, borrowers might be asked to provide everything from tax returns to a list of technology vendors to a customer reference list.

What are the four main types of business diligence information?

Different debt capital providers will ask for different types of information, but their requests can generally be bucketed into one of four categories: company overview information, financial information, customer or policy information, and historical data.

Let's look at how this might look for a fintech trying to raise debt capital.

Company overview information

Company overview information is high-level information that is typically publicly available. This information includes, for example, a company's website, marketing materials, org chart, and management team overview. For the borrower, this is often the easiest type of information to produce.

Financial information

Financial information includes not just the company's recent financial statements (i.e., balance sheet, cash flow statement, and income statement), but also information about how the requested debt capital will be used.

It also includes information on the company's capitalization (e.g., history of equity invested to date), forward-looking projections, and tax returns since inception.

Customer or policy information

Customer or policy information varies depending by industry. For a fintech, this might mean origination, risk, and sourcing information.

How does a fintech underwrite its customers, for instance? What technology does it rely on for banking and payment processes? How does a company detect and act on fraud?

Because understanding this information is vital to modeling the performance of a loan, it's common for debt capital providers to request follow-up information or clarification on some of the diligence documentation that companies produce.

From our experience, this information can take some time for companies to produce; even if it's been documented internally, that documentation generally isn't in the presentation format that debt capital providers expect to see.

Historical data

Historical data is a bit of a catch-all, but it tends to include things like customer origination, repayment, and loss history.

We've also seen some debt capital providers request unit economic analysis for different types of receivables, though the level of detail for this analysis can vary greatly by asset class.

Finally, debt capital providers may ask for representative contracts or documentation for customers, or a breakdown of customers by, say, performance history or FICO score.

This information is often the most time-consuming to produce, as it requires diverting resources from Engineering or Data Analysis teams towards Capital Markets efforts.

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