The Ultimate Commercial Loan Due Diligence Checklist: 100 Critical Questions Lenders Must Ask

Why This Checklist Matters

In today’s volatile economy, 1 in 3 small business loans default within 5 years. As a lender, asking the right questions upfront can mean the difference between a profitable portfolio and catastrophic losses. This 100-point due diligence framework—refined from 20+ years of cross-border lending—helps you spot risks early and structure safer deals.

Key Due Diligence Categories

(Condensed for actionable insights)

1. Industry & Market Risks (10 Critical Qs)

🔹 Sector Viability:

• Is the industry emerging, mature, or declining? (e.g., fossil fuels vs. AI startups)
• How sensitive is it to economic cycles, regulations, or tech disruption?
• Are profit margins above/below industry averages?

🔹 Competitive Positioning:

• Is the business a market leader or struggling mid-tier player?
• Does it face oversupply, price wars, or substitution threats? (e.g., EVs killing gas cars)

2. Ownership & Governance Red Flags (12 Qs)

🔹 Shadow Control Risks:

• Are beneficial owners clearly identified, or is equity held by shell companies?
• Do “silent partners” have criminal/financial scandals? (Run LexisNexis checks)

🔹 Management Gaps:

• Is there high turnover in CFO/COO roles? (Sign of fraud or incompetence)
• Does the CEO avoid site visits while claiming 80-hour workweeks?

3. Financial Statement Forensic Analysis (25 Qs)

🔹 Cash Flow Truth-Testing:

• Compare reported revenue with bank deposits, tax filings, and supplier invoices.
• If accounts receivable >6 months old, why aren’t clients paying?

🔹 Debt Traps:

• Are short-term loans funding long-term assets? (Classic “loan stacking” red flag)
• Is the debt-to-EBITDA ratio above 4x? (High default correlation)

4. Collateral & Legal Pitfalls (15 Qs)

🔹 Asset Verification:

• Are inventory/equipment values inflated? (e.g., “$500K machinery” is 10 years old)
• Check UCC filings: Is collateral double-pledged to other lenders?

🔹 Contract Loopholes:

• Do supplier agreements allow raw material repossession if unpaid?
• Are key patents/copyrights pledged elsewhere?

Case Study: The $2M Loan That Almost Went Bad

Client: A Midwest manufacturer claimed 40% annual growth, but due diligence revealed:

• $1.2M “receivables” were from a defunct distributor.
• The “new factory” was an empty lot with doctored photos.
• The CFO quit abruptly during underwriting.
  Outcome: Deal rejected. Company filed Ch.11 months later.

Top 5 Overlooked Questions

1. “Show me your business credit card statements” – Reveals undisclosed cash advances.
2. “Who audits your inventory counts?” – Exposes phantom stock schemes.
3. “What’s your busiest month for returns?” – Uncovers seasonal liquidity crunches.
4. “Which competitor do you fear most?” – Tests market awareness.
5. “Walk me through one day of operations” – Detects front businesses.