What Lenders Miss: Why You Still Need Diligence Even if the Bank Approves the Loan

Getting your SBA loan approved feels like a win. It’s the green light you’ve been waiting for. But here’s a common misconception that trips up a lot of first-time buyers:

“If the bank approved the loan, the business must be solid.”

Not quite.

What the bank cares about—and what you should care about—are two very different things. One is focused on loan repayment. The other is focused on your long-term success as a new business owner.

And if you confuse the two, you risk overpaying, underperforming, or worse—getting stuck with a business that looks great on paper but bleeds cash in real life.

What Your Lender Actually Reviews

Lenders do a form of due diligence, but it’s narrow and compliance-driven. They're not trying to poke holes in the business model—they're trying to protect their downside. Their focus is:

• Do the tax returns show enough net income to cover debt service?
• Is there a strong enough debt service coverage ratio (DSCR), usually 1.15–1.25x?
• Are there any legal or credit issues that disqualify the borrower or the business?
• Does the loan meet SBA eligibility requirements?

In most cases, that’s the extent of their underwriting.

So if a seller inflates SDE with questionable add-backs, or if the financials have been groomed for a sale, the bank won’t catch it. As long as the math works on paper, they’ll move forward.

What Lenders Don’t Review (But You Definitely Should)

Here’s what’s usually outside the scope of bank underwriting—but directly impacts whether you’re making a smart investment:

• Are the financials accurate? Tax returns don’t always match the internal books.
• Are add-backs legitimate? Or are they recurring expenses disguised as one-offs?
• Is the business overly dependent on the owner, one customer, or a single vendor?
• Are margins consistent—or deteriorating?
• Is there deferred maintenance, underpaid labor, or artificially low expenses?
• Is working capital sufficient post-close—or will you need more cash day one?
• If you’re pledging personal assets (like real estate or existing business equity), are you confident the business truly performs as advertised?
  The bank may greenlight more aggressive deals knowing they can seize your assets if the business underperforms. That makes high-quality diligence even more critical for asset-backed borrowers.

Real Example: What the Bank Missed

We worked recently with a buyer acquiring a restaurant with multiple locations. The seller’s P&Ls looked solid. The SBA loan was approved. Everything appeared smooth.

But during diligence, here’s what we found:

• Loan proceeds had been misclassified as revenue.
• Revenue and expenses from one of the locations were not consolidated into the financials.
• Payroll was understated due to owner contributions that weren’t accounted for.
• SDE was overstated by more than $70K.

The bank didn’t flag any of this. Why? Because their box was checked—the DSCR was acceptable based on tax returns. But those returns didn’t reflect the real economics of the business.

Thanks to diligence, our client renegotiated the price and protected their investment. If they had relied on the bank’s “approval,” they would’ve overpaid by six figures.

Your Incentives Aren’t the Same as the Bank’s

Banks want to get paid back. You want to build a sustainable, profitable business.

Your incentives as the buyer are aligned with understanding:

• What’s real and repeatable.
• Where the risks are hidden.
• How much working capital you’ll actually need.
• Whether the cash flow can support debt, capital to grow the business, and your lifestyle.

Diligence helps you understand that. Bank approval does not.

So What Does a Good Diligence Process Actually Look Like?

At a high level, buy-side financial diligence should:

• Validate revenue — tie it to bank statements, test for concentration, seasonality, or dependency on one-off events.
• Analyze expenses — make sure COGS, payroll, and overhead aren’t artificially low or spiky.
• Normalize EBITDA or SDE — validate add-backs and recast the financials so they reflect the business under new ownership.
• Evaluate working capital — identify whether the business needs a post-close injection of cash to stay afloat.
• Assess quality of earnings — make sure the reported profits are real, recurring, and sustainable.

This doesn’t need to be a 50-page investment bank-style QoE. For smaller deals, a focused, “right-sized” diligence review goes a long way in helping you make an informed decision—and gives you leverage in negotiations if adjustments are needed.

Think of Diligence as Insurance for the Biggest Check You’ve Ever Written

Some buyers hesitate to invest in diligence. But consider what’s at stake:

• You’re likely putting down 10%–20% in equity.
• You’re signing a 10-year SBA loan, often personally guaranteed.
• You’re betting your time, energy, and future income on this one deal.

The cost of skipping diligence isn’t just overpaying—it’s stepping into a business with unknown liabilities, inaccurate numbers, or operational risks you won’t discover until it’s too late.

Done right, diligence often pays for itself many times over—whether by surfacing issues that lead to a price adjustment, or just giving you peace of mind that what you’re buying is real.

A Quick Word on SBA-Specific Risks

SBA deals create a false sense of security. After all, it’s a government-backed loan, the bank approved it, and everything seems to check out. But that’s exactly why diligence matters more, not less.

SBA lenders typically:

• Review 2–3 years of tax returns and a basic P&L.
• Ask for a seller-prepared worksheet of add-backs.
• Confirm that DSCR is above the threshold.

They don’t:

• Review internal books or reconcile financial statements.
• Test whether add-backs are defensible.
• Verify customer-level revenue or margin trends.
• Analyze the impact of a post-close transition.

And remember: you’re still personally on the hook for the loan. If the business fails, the lender will come to you—not the seller.

The Bottom Line

Bank approval is not diligence. It’s a financing green light, not a go-ahead on the deal itself. You still need to do the work—or bring in someone who will.

If you’re about to acquire a business, especially with SBA financing, give yourself the same edge that private equity firms give themselves: an outside diligence partner who knows how to spot risks, validate earnings, and protect your downside.

That’s how you buy with clarity—not just confidence.

Looking at a Deal? Let’s Talk.

At High Point Advisory Group, we specialize in financial due diligence for small business acquisitions—particularly where the buyer is using SBA or seller financing and wants to go beyond the surface.

Whether you need:

• A full Quality of Earnings report
• A faster, tax-return–based diligence review
• Help validating SDE and working capital
• Or a second set of eyes on a deal before you close

We’re here to help you buy smart—and avoid surprises.

👉 Get in touch and let’s make sure your next deal closes cleanly and confidently.

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