Testing the Credit Story: What Happens After a Signed Loan Proposal?

Signing a lender’s letter of intent—or loan proposal—is an important milestone. It establishes the proposed economics and gives the lender and borrower a framework for moving toward closing.

But it is not a final credit approval or an unconditional commitment to fund.

After signing, the lender must complete underwriting, obtain final internal approvals, conduct legal and collateral due diligence, and negotiate definitive documentation. Depending on the financing, the process may also include a Quality of Earnings review, field examination, asset appraisal, background checks, insurance review or other third-party work.

For borrowers, this phase can feel like a black box. Understanding what happens behind the scenes can help management teams anticipate questions, identify risks earlier and reduce the likelihood of unexpected changes to structure, availability or timing.

From Preliminary Terms to an Approved Credit

Before issuing an LOI, a lender typically performs enough initial work to determine that a transaction may fit its investment criteria. After signing, it must develop a much more complete case for approving and funding the loan.

The underwriting team will generally prepare a credit memorandum addressing:

• The company, management team, market and ownership

• Historical performance and financial reporting

• Forecast assumptions, liquidity and cash requirements

• Primary and secondary sources of repayment

• Leverage, debt-service capacity and covenant headroom

• Collateral value, lien priority and legal risks

• Key credit risks and proposed mitigants

• Recommended structure, pricing and monitoring requirements

  
  

The lender is effectively testing whether the facts support the original credit thesis. The OCC describes credit underwriting as an evaluation of factors including repayment sources, borrower financial capacity, collateral, guarantor support, loan structure and relevant risks.¹ Federally insured banks conduct underwriting within an established regulatory and supervisory framework, while private credit firms typically follow their own proprietary investment and approval processes. Although specific procedures vary by lender and financing type, the fundamental questions surrounding repayment capacity, risk and downside protection are broadly consistent.

New information can strengthen the case, but it can also lead to changes in facility size, advance rates, covenants, amortization, pricing or closing conditions.

Testing the Financial Case

The lender will compare historical results, the current-year forecast and management’s longer-term plan. It may rebuild EBITDA, analyze working-capital movements, examine cash conversion and test the company’s ability to absorb a downside scenario.

Common questions include:

• Are revenue and margin assumptions consistent with historical performance?

• How concentrated are customers, suppliers or contracts?

• Which EBITDA adjustments are recurring and supportable?

• How much liquidity exists if collections slow or growth misses plan?

• Can the company comply with covenants under a downside case?

• Will additional capital be required before maturity?

  
  

This is where a well-constructed financial model becomes critical. Borrowers should model the lender’s actual definitions—not simply management’s presentation of EBITDA or cash flow.

Leverage ratios, fixed-charge coverage tests, minimum-liquidity requirements and borrowing bases should be calculated under the proposed loan definitions. A covenant that appears comfortable in a management model can behave differently after lender adjustments, eligibility exclusions or contractual definitions are applied.

Third Party Diligence Should Match the Financing

The scope of diligence varies by transaction.

• For a cash-flow loan, the lender may commission a Quality of Earnings review to assess revenue recognition, earnings adjustments, customer trends and the sustainability of EBITDA. Proof-of-cash work may reconcile reported revenue or receipts to bank activity and other records.²

• For an asset-based facility, a field examination may test receivable aging, collections, dilution, credits, inventory reporting and borrowing-base controls. An inventory appraisal may estimate liquidation value and help determine advance rates and reserves. OCC guidance emphasizes collateral quality, controls, reporting and liquidation value—not merely the amount shown on the balance sheet.³

• Equipment lenders may evaluate asset condition, location, ownership, useful life and resale value.

• IP-backed lenders may require specialized valuation and legal analysis addressing ownership, enforceability, transferability and perfection. Portfolio or warehouse lenders may test data tapes, eligibility criteria, concentrations, historical losses and underlying account files.

Third-party diligence is not separate from underwriting. If a field examination, Quality of Earnings review, appraisal or other third-party analysis identifies discrepancies or material issues, the lender may revise the facility size, advance rate, covenants, reserves, pricing or other proposed terms. In some cases, the findings may affect whether the lender is willing to proceed at all.

Legal Diligence and Collateral Perfection

Legal diligence is another area borrowers frequently underestimate.

Lender’s counsel may review organizational documents, capitalization, existing debt, liens, litigation, material contracts, intellectual property, regulatory matters and required consents. Background checks may also be conducted on founders, senior executives or other key persons. The lender and its counsel will also determine how to establish and perfect the lender’s security interests.

The perfection certificate often becomes the roadmap for this work. It may request information about legal names, prior names, jurisdictions, locations, bank accounts, intellectual property, subsidiaries, owned property and existing liens.

Incomplete information can delay searches, filings, account-control agreements and closing. More significantly, diligence may uncover restrictions, competing claims or other issues that affect the lender’s collateral position or willingness to proceed.

Borrowers can reduce surprises by reviewing these items before signing an LOI—not after legal bills and closing deadlines begin accumulating.

Preparing Before the Lender Asks

A strong diligence process begins early. Borrowers should consider:

• Building an organized and internally reconciled data room

• Preparing a clear bridge from reported to adjusted EBITDA

• Identifying customer, vendor and contract concentrations

• Reviewing lien searches and existing debt documents

• Completing a preliminary perfection-certificate exercise

• Stress-testing proposed covenants and borrowing bases

• Preparing for field exams, appraisals or Quality of Earnings work

• Disclosing potential issues with an explanation and remediation plan

  
  

Transparency matters. Most lenders recognize that businesses have risks and imperfections. What causes concern is discovering a material issue late, receiving inconsistent information or concluding that management does not understand the problem.

How Axis Helps Borrowers Prepare

With approximately 20 years of credit investing and advisory experience, Axis Group Ventures helps borrowers anticipate the underwriting process from the lender’s perspective.

Our work can include developing the diligence request list, preparing the financial and credit narrative, reviewing legal-diligence and perfection items, coordinating third-party reviews, and modeling covenants, borrowing bases and downside liquidity.

The goal is not to eliminate lender scrutiny. It is to help the borrower enter underwriting prepared, understand where the real risks lie and address those risks before they threaten economics, execution or closing certainty.

A signed LOI is not the end of the financing process. It is the beginning of testing the credit story.

About Axis Group Ventures

Axis Group Ventures is a boutique investment banking and strategic advisory firm focused on global debt placement and private-market secondaries for venture- and private equity-backed companies. We work with founders, C-suite executives, and investors to develop and execute customized private-market capital solutions. For more information, visit www.axisgroupventures.com.

Sources

1. Office of the Comptroller of the Currency, Lending and Loan Portfolio Risk Management, Comptroller’s Handbook, Version 1.0, July 2026.

2. Kroll, The Critical Role of Proof of Cash Reconciliation in Financial Due Diligence, August 8, 2025.

3. Office of the Comptroller of the Currency, Accounts Receivable and Inventory Financing, Comptroller’s Handbook, March 2000.

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Disclosures & Disclaimers

This blog post is provided by Axis Group Ventures for informational and educational purposes only. It does not constitute investment, legal, accounting, or tax advice and should not be relied upon as such. Nothing contained herein should be interpreted as an offer to buy or sell any securities. Any actual offer or solicitation will be made exclusively through formal documentation provided by the relevant issuer or seller.

Axis Group Ventures is not a registered broker-dealer and does not execute, negotiate, or recommend the purchase or sale of securities. Any introductions or private-market support provided by Axis Group Ventures are conducted strictly in an advisory and consulting capacity. Readers should conduct their own due diligence and consult qualified professionals before making any financial decisions.

Investments in private securities involve significant risks, including the potential loss of the entire investment, and are typically illiquid. Past performance does not guarantee future results.

This blog post was developed using Axis Group Ventures’ proprietary market knowledge, professional insights, and years of industry experience, supplemented by large language model technology to assist with drafting and editorial refinement.