Due Diligence for Non-Bank Lenders: Painting a Risk Profile


As interest rates continue to rise and public markets remain volatile, private credit markets have filled a critical void as a source of capital for commercial real estate borrowers and middle market companies. However, direct lending transactions are complicated and deal timelines are only getting tighter, which means that the background check portion of a lender’s due diligence process must be quick while not sacrificing quality or comprehensiveness. Additionally, alternative lenders often lack the compliance resources available at leading investment banks and can be exposed to significant risk. Non-bank lenders must be surgical in screening borrowers and partner with a background check provider that will quickly identify red flags to help determine borrower risk. In this guide, Vcheck has outlined three primary risk areas to focus on for vetting borrowers, common red flags and the importance of contextualizing background check findings to paint a risk profile and spot adverse patterns. 

Creditworthiness & Red-Flags

Lenders must understand a borrower’s ability to make payments on the loan as well as other financial liabilities. This starts with assessing the borrower’s creditworthiness as well as screening for bankruptcies and tax liens. Additionally, identifying UCC filings will help Asset-based Lenders in particular understand if a borrower’s assets have been pledged as collateral in another transaction.

Litigation History

A borrower’s ability to repay their loan can be directly impacted by litigation filed against the company and resulting claims and damages that the company may be liable for. If a borrower is preoccupied with their legal battles, making payments on their loan may become less of a priority or they may not have the financial resources to repay the loan. The same idea holds true for the borrower’s executive leadership. If they are involved in personal litigation, it can be a distraction to their executive responsibilities, including proper corporate governance.

Regulatory and Reputational Risk

The risks and repercussions of doing business with a sanctioned or state-owned party has never been higher and fraud in the lending industry has been ever present. Lenders must establish the identities and existence of borrowers through identity and corporate record verification methods as well as ultimate beneficial owner searches. Moreover, lenders must screen borrowers against sanctions lists and other watchlists to ensure they are upholding Know Your Customer best practices and avoid hefty fines and reputational damage.

Context is Key

While identifying a significant red flag in the background check process can stop a deal in its tracks, it is important not to overlook patterns of adverse information and the timeline of their occurrence. A combination of negative findings such as outstanding debt, litigation, and adverse media can be indicative of risk, particularly when there is a pattern over the years, or the events have occurred recently. Moreover, the identification of risk indicators in the personal lives of a borrowing company’s leadership team, such as a recent DUI or an assault charge, may be connected to larger issues at the company, jeopardizing its ability to meet its financial obligations.

To learn more about how Vcheck’s due diligence services support alternative lenders, connect with our team of experts here at Vcheck. Our diversity of investigative offerings, paired with industry-leading turnaround times and in-depth reporting, means you receive the quality information you need, when you need it.

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