Growth debt due diligence

Growth debt due diligence is the lender's process for deciding whether the company can support a loan, what could prevent repayment and which terms are needed to control that risk.

It is not simply a check that the data room is complete. A lender is testing the business case, the quality of the numbers, the available sources of repayment and how the company behaves when assumptions are challenged.

What the lender is trying to answer

Most diligence questions lead back to four decisions.

1. 1Is this a business the lender is willing and able to finance?
2. 2How much can it prudently lend, and when should the money be available?
3. 3What is the credible source of interest and principal repayment?
4. 4What structure, covenants, security and reporting are needed if performance is weaker than planned?

Venture debt lenders may place more weight on growth, liquidity, investor support and future fundraising than a conventional cash-flow lender. That does not make equity support a guarantee. The lender should still test whether funding assumptions are realistic and what happens if they fail.

The main diligence areas

Management and governance

The lender will meet the founders and usually the finance lead. It will assess experience, ownership of the forecast, decision-making and whether the company has the people and systems needed for its next stage.

Expect questions about senior-team gaps, board composition, management incentives, reporting cadence and succession or key-person risk. A polished presentation will not compensate for unclear accountability.

The strongest preparation is for the executives who own each assumption to explain it in the same way. If sales, finance and product teams use different definitions or forecasts, the lender will question the control environment as well as the number.

Customers and revenue quality

Revenue quality describes how predictable, repeatable and collectible revenue is. A lender may analyse customer concentration, contract length, renewal rights, churn, pricing, payment terms, cancellations and the difference between contracted revenue and pipeline.

For a subscription company, annual recurring revenue, or ARR, is a normalised annual value of recurring contracts. It is not always the same as accounting revenue or cash collected. Reconcile the metric to the finance system and define every adjustment.

Gross revenue retention measures recurring revenue kept from an existing customer group before expansion. Net revenue retention includes expansion as well as contraction and churn. Explain the calculation period, currency treatment and any acquisitions.

For transactional or project businesses, the lender may focus more on order book, repeat purchase behaviour, gross margin, utilisation, working capital and customer payment patterns.

Prepare customer-level data that ties to reported totals. Expect the lender to investigate unusually large contracts, rapid changes, credits, related parties and dependence on one route to market.

Historical financial performance

Historical accounts show what has happened; management accounts provide a more current view. The lender will reconcile revenue, gross profit, operating costs, cash and debt across audited or statutory accounts, monthly reporting and bank information.

Explain material differences between actual performance and prior budgets. Missing a forecast is not automatically disqualifying, but unexplained misses weaken confidence in the new plan.

Normalise genuine one-off items carefully and show both the reported and adjusted view. Avoid removing recurring costs merely because management hopes they will fall.

A quality-of-earnings review is more common in larger or complex transactions. It tests how reported earnings or revenue translate into sustainable cash flow. The lender may conduct this internally or use an external adviser.

The forecast and operating model

The model should connect operating drivers to the profit and loss account, balance sheet and cash flow. Revenue assumptions should link to customers, volumes, pricing, sales capacity or other measurable drivers.

Cash is central. Show monthly opening cash, operating cash flow, capital expenditure, financing, interest, fees, principal repayments and closing cash for the full facility term where practical.

A base case should represent the company's expected outcome, not its sales target. Add downside cases that reduce growth, delay fundraising, compress margin or increase costs. State which management actions are genuinely available and how quickly they could take effect.

Runway is the time until the company exhausts available cash. A lender may also measure remaining months of liquidity using an agreed cash-burn calculation. Definitions matter because average burn, forward burn and unrestricted cash can produce different answers.

Unit economics and cohort evidence

Unit economics describe the revenue and direct costs associated with a customer, order or other useful unit. They help test whether growth creates value or simply increases cash burn.

Metrics may include gross margin, customer acquisition cost, payback period and customer lifetime value. Present the underlying data and assumptions rather than a single headline ratio.

Cohort analysis groups customers by start date or another shared feature and follows their behaviour over time. It can reveal retention, expansion and payback patterns that blended totals hide.

Equity backing and future funding

The lender will review the cap table, prior financing documents, investor concentration, available shareholder capital and the milestones for any next round.

Venture investors do not provide an implied guarantee. Treat a future round as uncertain unless binding commitments exist. Show the cash plan both with and without the expected financing, and identify the date by which the company would need to change course.

A recent high valuation may support market confidence, but it does not itself repay debt. The lender will consider current performance, market conditions and whether a future valuation can support new investment.

Existing debt and liabilities

Provide a complete schedule of loans, overdrafts, leases, hire purchase, receivables finance, shareholder debt, guarantees and material contingent liabilities. Include undrawn amounts, maturity, security and key restrictions.

The lender needs to understand creditor priority. Existing security, negative pledges and intercreditor arrangements may limit the new lender's rights or require consents.

Reconcile the schedule to the balance sheet and legal documents. Do not omit a facility because it has no current balance or describe a lease as operational if it creates contractual payment and asset rights.

Legal, corporate and regulatory review

Legal diligence usually covers incorporation, ownership, constitutional documents, material contracts, litigation, employment matters, licences, data protection, regulatory permissions and group structure. The scope depends on sector and jurisdiction.

The lender is looking for issues that could interrupt the business, invalidate an assumption or prevent the agreed security from being granted and enforced.

Know-your-customer and anti-money-laundering checks verify the company, beneficial owners, directors and source of funds. Collect current identity, ownership and corporate records early, particularly for complex or international groups.

Intellectual property and security

Intellectual property, or IP, can include patents, trade marks, copyright, designs and confidential know-how. The lender will want to know which group company owns material IP and whether employees, founders and contractors have assigned relevant rights.

Security diligence maps assets, legal entities, bank accounts, existing liens and any restrictions on granting security. Asset-light businesses should not assume this work is unimportant: cash, receivables, IP and subsidiary shares may all be relevant.

External counsel may verify ownership, filings and perfection steps. Perfection is the legal process that makes security effective against relevant third parties or establishes priority.

Downside and recovery analysis

The lender will test what happens if the plan is missed. That may include lower revenue, reduced fundraising availability, delayed customer payments, cost reductions, a sale process or an orderly wind-down.

A harvest case estimates cash from existing customers while discretionary growth spending is reduced. It can be informative, but it may overstate cash if the company still needs product, service and support costs to retain those customers.

Collateral values can also fall in distress. An enterprise valuation, investor reputation or unrestricted cash balance should not be treated as certain repayment when the business is under pressure.

How the process usually unfolds

1. 1Initial screening. The lender reviews the company, requested amount, use of funds and broad eligibility.
2. 2Indicative proposal. The parties discuss possible size, pricing, maturity, covenants and security, often before full approval.
3. 3Detailed diligence. Management provides information, answers questions and joins commercial, financial and legal sessions.
4. 4Credit approval. The lender's decision-makers assess the proposal, risks, mitigants and conditions.
5. 5Confirmatory work and documentation. Outstanding items, legal diligence, security and conditions precedent are completed.
6. 6Closing and drawdown. The company satisfies agreed conditions before funds become available.

An indicative term sheet is not the same as committed funding. Ask which approvals and diligence steps remain, and do not plan cash around an uncertain closing date.

How to prepare well

• Create a single source of truth for historical results, operating metrics and the forecast.
• Reconcile customer data, management accounts, statutory accounts, cash and debt.
• Write a short assumptions book defining every key metric and model driver.
• Maintain a question log with an owner, answer, supporting file and date.
• Disclose known issues with their financial effect and remediation plan.
• Use clear file names, version control and access permissions in the data room.
• Prepare a downside case before the lender asks for one.
• Check what requires board, shareholder, existing lender or third-party consent.

Common red flags

• Metrics that do not reconcile to financial reporting.
• A forecast that assumes faster growth and lower costs without operational evidence.
• Material customer concentration hidden inside an aggregate number.
• Unclear IP ownership or undocumented founder and contractor assignments.
• Existing debt, security or litigation disclosed late.
• A runway plan dependent on an uncommitted financing round.
• Different answers from management team members to the same factual question.

The bottom line

Growth debt due diligence tests repayment, resilience and trust. The lender wants to know how the business performs, what could go wrong and whether management has both the information and discipline to respond.

Prepare by reconciling the facts, defining the metrics and presenting a realistic base case and downside. A well-organised data room helps, but consistent and credible answers are what make the information useful.

Where to go next

• Preparing a growth debt data room shows what to prepare and how to organise lender information.
• How growth lenders assess companies sets out the underwriting questions behind a lender’s decision.
• Growth debt term sheets explained shows how to read the whole offer before long-form documents.
• Choosing a growth lender helps compare lender fit, behaviour and decision making.