What Diligence Should Be Completed Before Investing in a Private Credit Deal?

Private credit diligence should establish whether repayment is plausible and what recovery could look like if it fails. Keep those questions separate. Strong collateral does not solve weak repayment capacity, and projected repayment does not prove a lender can enforce its rights.

Trace the Repayment Source

Request historical financial statements, interim results, bank statements, a debt schedule, and a cash forecast. Reconcile reported earnings with cash available for debt service after working capital, capital spending, taxes, and debt payments beyond scheduled principal. Identify the expected source of principal repayment: operating cash flow, refinancing, or an asset sale. Ask for records supporting its amount and timing.

Ask, "What cash will repay principal, and when?" and "What changes if that source is delayed or reduced?" Stress weaker revenue and margins, then test lower collections. Check debt at the borrower and guarantor level, including maturities and guarantees. Review liens and cross defaults separately. A borrower may make interest payments and still face a principal gap at maturity. For borrower repayment analysis, see how to test whether a borrower can repay a loan.

Establish Collateral Value and Priority

List each pledged asset and confirm ownership and condition. Check for existing claims. Request appraisals or other value support, insurance records, and documents identifying the collateral. For real estate, review title and recorded liens. For receivables, check aging and disputes, then review concentration and eligibility. For equipment, confirm its location and identification, then assess its condition. Obtain a lien search through the appropriate registry, and have counsel confirm how the security interest is created and perfected.

Ask, "Who ranks ahead of this lender?" and "What net proceeds could remain after enforcement costs and delay?" Test recovery using lower collateral values and realistic sale time. Include accrued interest and expenses. An appraisal does not mean cash is available on demand. See collateral checks before making a private loan for asset specific review.

Read the Loan Controls and Default Path

Review the rate, fees, maturity, amortization, financial covenants, reporting duties, and default triggers. Consider cure periods and guarantees, then review available remedies. Ask who receives reports, how often collateral is checked, who can waive a covenant, and what happens after a missed payment. Identify any conditions that could delay enforcement or let another lender control the process. A lawyer familiar with the relevant collateral and jurisdiction can assess the documents and priority.

Examine the originator and manager roles, then review the servicer's duties. Request conflict disclosures and related party fees. Review servicing terms and ask what capital they have at risk. Confirm how cash is received and recorded, then check how it is applied to principal and interest. Review fees separately. Ask, "Who monitors the loan after closing?" and "Who decides whether to amend or enforce it?" The family office investment committee guide can help assign review and escalation responsibility.

Checklist

• Reconcile borrower earnings and forecasts to cash records.
• Document the expected repayment source and test delays or shortfalls.
• Confirm collateral ownership and condition. Check liens and lender priority.
• Estimate recovery after lower values and enforcement costs. Allow for enforcement time.
• Review covenants and reporting with counsel. Discuss defaults, guarantees, and remedies.
• Confirm servicing responsibilities and conflicts. Check cash application controls.

Talk with your attorney about loan rights and with your CPA about tax treatment.

Go deeper: capital call and liquidity planner.

If we're funding debt, we deserve security.

Sources: Family Office Club investor due diligence framework, The Single Family Office. Informational only, not financial, legal or tax advice.