Underwriting is only as good as the numbers it rests on. Diligence is how a lender confirms that the collateral exists, that it is worth what the borrower says, that the lender’s lien will be valid and first, and that the people involved are who they appear to be. This entry describes the diligence a senior secured lender typically performs, how it differs by collateral and what borrowers can do to make it efficient.
Principles
- Focused, not exhaustive. The best diligence answers the questions that decide the loan and leaves the rest alone.
- Independent where it matters. Values that size the loan should come from qualified third parties or from our own work, not only from the borrower.
- Owner’s eyes. Because Caldrion owns and operates real assets and businesses, we review budgets, leasing assumptions and operating plans as an owner would.
- No surprises. A complication disclosed early is a structuring question. The same complication discovered late is a credibility question.
Diligence by collateral type
| Collateral | Core valuation work | Other typical items |
|---|---|---|
| Commercial real estate | Appraisal (as-is, as-complete, as-stabilized) | Property condition report, Phase I environmental, survey, zoning report, title, rent roll and lease review, site visit |
| Construction or renovation | Appraisal plus budget and schedule review | Plans and specifications, contractor review, permits, construction consultant engagement for draws |
| Receivables and inventory | Field examination | Customer concentration, dilution analysis, inventory appraisal (net orderly liquidation value), system review |
| Machinery and equipment | Liquidation appraisal (orderly and forced) | Serial numbers, location, condition, lien searches |
| Portfolio of private investments | Review of manager valuations, sometimes independent | Underlying company data, concentration, fund documents, transfer restrictions |
| Loan pools | Loan tape analysis, sample file review | Credit policy, servicing review, historical performance by vintage |
| Royalties and contracts | Cash flow model against verified history | Contract and license review, counterparty credit, audit rights |
Real estate in more detail
An appraisal is the starting point, but we read it rather than accept it. We test rent assumptions against the rent roll and comparable leases, expense assumptions against trailing operating statements (the T-12) and capitalization rates against recent transactions. For transitional assets, we focus on the as-is value and on the cost and time to complete the plan. A property condition report identifies deferred maintenance and capital needs; a Phase I environmental assessment identifies potential contamination that could impair value or create liability. Title insurance and a survey confirm what the mortgage will cover. See real estate bridge and construction loans.
Asset-based collateral in more detail
A field examination is an on-site review, typically by specialist examiners, of the borrower’s receivables, inventory and reporting systems. It tests whether invoices are real and collectible, how much is lost to credits and returns (dilution), whether inventory counts match the books and whether the borrowing base certificate can be relied on. Inventory and equipment appraisals estimate what the assets would bring in an orderly liquidation, which is what the borrowing base advances against. Field exams usually recur during the life of the loan, not only at closing.
Financial assets in more detail
For NAV loans, we review how the portfolio is valued, the performance and leverage of the underlying companies and the restrictions on transferring or pledging interests. For lender finance, we analyze the loan tape, review a sample of loan files against the originator’s credit policy and study historical defaults and recoveries. For royalty and contract monetization, we verify payment history against counterparty statements and have counsel review the underlying rights. The Ledger and Meridian case studies show what that work looks like in practice.
Diligence on every loan
- Background checks on principals and guarantors, including litigation, liens, judgments and bankruptcies.
- Know-your-customer and sanctions screening, as required for any lender.
- Corporate and legal structure: formation documents, ownership charts, authority to borrow and pledge.
- Lien searches: UCC, tax lien and judgment searches to confirm that our lien will be first. See collateral, security and guarantees.
- Insurance review: property, casualty and liability coverage with the lender named appropriately.
- Financial statements: historical and interim, with a quality-of-earnings report where earnings drive the credit.
- Guarantor financials: net worth and liquidity for anyone giving a guarantee.
Who pays
In private lending it is customary for the borrower to bear the cost of third-party reports and the lender’s legal fees, usually through a deposit at term sheet. The deposit and its uses are set out in the term sheet. See from term sheet to funding.
Red flags
- Valuations commissioned by the borrower for a different purpose, presented without the engagement letter.
- Receivables concentrated in related parties, or agings that improve suspiciously just before a field exam.
- Inventory that cannot be counted or located.
- Rent rolls that do not reconcile to bank deposits.
- Unexplained changes in key facts between the first conversation and diligence.
- Reluctance to allow site visits or direct contact with the people who know the collateral.
How borrowers can make diligence faster
- Organize a data room with a clear index, and share a link. Our forms take links, not uploads.
- Provide recent third-party reports, even if we will order our own; they show us early where issues lie.
- Name the people who can answer questions about the collateral, and make them available.
- Disclose complications at the outset.
What to send at first contact is set out in how to request a loan and in our guide Bringing Caldrion a loan request. For how diligence feeds the credit decision, see how we underwrite a loan; for the ratios it supports, see leverage and cash flow versus asset-based underwriting.
This entry is general information as of November 2026, not investment, legal or tax advice, and not an offer of securities.