Due diligence is an important exercise in a loan transaction because it allows the lender to make an informed decision as to whether it should lend money to the borrower and, if so, on what terms. A thorough due diligence review of the borrower and its business ensures that the loan does not involve legal risks that the lender is unaware of that could endanger the repayment of its loan. Due diligence is an effective tool for uncovering aspects of the borrower's business that can either:

The failure to identify significant legal risks in a loan transaction can cause problems for a lender, ranging from an unfavorable business transaction to legal liability and the obligation to pay damages.

The scope of a due diligence investigation is driven by:

Counsel must know which questions to ask and the proper steps to follow to carry out a sufficiently detailed review that serves their client's interests. Due diligence typically involves a large number of documents that must be exchanged and carefully examined. This often requires coordination of a team of reviewing attorneys, good organizational skills and planning a well-defined scope to the due diligence exercise.

Depending on the transaction and the nature of the borrower's business, due diligence concerns may vary. For example, a lender's credit analysis and due diligence review of a business with extensive real estate holdings will focus on different issues than a lender's credit analysis and due diligence review of a holding company with assets consisting largely of securities in subsidiaries and intellectual property.

This Toolkit provides links to numerous continuously maintained resources that are relevant to various aspects of a legal due diligence review in a financing transaction. This list is organized according to the stage of the due diligence review, and provides specific information about different substantive areas of the business that are examined in a due diligence review.