Vendor due diligence: Definition, process, and checklist

Your vendors are an extension of your business, and when they fail, the impact shows up fast in the form of data breaches, cash flow disruptions, missed deadlines, or service outages that complicate close.

As companies rely more heavily on third-party vendors and SaaS providers, that risk has grown. A 2025 study from Mitratech found that 35.8% of organizations experienced a data breach or security incident due to poor vendor security practices.

Without a structured way to evaluate and monitor vendors, finance teams are often left reacting to issues that could have been identified much earlier.

What is vendor due diligence?

Vendor due diligence is the process organizations use to assess the financial, operational, security, legal, and reputational risks associated with working with a third-party vendor. The goal is to determine whether a supplier can reliably support your business and whether any risks need to be addressed before or during the relationship.

For finance teams, vendor due diligence plays a direct role in protecting spend integrity and financial reporting. Before adopting a new accounts payable automation platform, for example, you would typically review the vendor’s security controls, financial stability, and service-level commitments to ensure the tool does not introduce operational disruptions or compliance risk.

Vendor due diligence vs. other types of due diligence

Teams often encounter different forms of due diligence during procurement, risk management, or M&A discussions. While the terms sound similar, they serve distinct purposes and apply at different points in the business lifecycle:

The distinction matters because vendor due diligence is an ongoing risk management discipline. Commercial and seller-side diligence are transaction-focused and typically end once ownership or contractual terms are finalized.

Why vendor due diligence matters for your business

Vendor risk has become a meaningful source of financial disruption. As organizations rely on more SaaS tools and outsourced services, failures at third-party vendors can quickly translate into cash flow issues, reporting delays, and operational breakdowns.

Those failures are increasingly expensive. IBM’s 2025 Cost of a Data Breach Report found that third-party vendor and supply chain compromises remain among the costliest breach types, with an average impact of $4.91 million per incident, while average breach costs in the United States climbed to a record $10.22 million, driven largely by regulatory fines and detection costs

Vendor due diligence helps reduce exposure to these outcomes by identifying financial, security, compliance, and operational risks before contracts are signed or renewed, when teams still have leverage to address them.

The real cost of inadequate vendor oversight

Weak vendor oversight typically shows up in three places: unplanned spend, operational delays, and regulatory exposure.

For example, a mid-market company migrating to a new payments processor discovered late in the process that the vendor had ongoing settlement delays with several clients. The resulting cash flow disruption forced the finance team to rely on manual workarounds during month-end close.

Beyond direct remediation costs, breaches increasingly disrupt operations. The 2025 IBM Cost of a Data Breach report found that 86% of organizations experienced business disruption following a data breach, underscoring how vendor failures can ripple through billing, collections, and customer-facing workflows

Regulatory requirements driving vendor due diligence

Many compliance frameworks expect organizations to evaluate and monitor their vendors, particularly when third parties affect financial reporting or handle sensitive data.

Finance teams most often encounter these requirements through GDPR when vendors process personal or payment data, SOX when vendor systems influence internal controls, and industry-specific standards such as PCI-DSS, HIPAA, or GLBA. The objective is not legal perfection, but clear visibility into where vendor relationships intersect with audit and regulatory expectations.

Key risk areas to evaluate during vendor due diligence

Vendor risk spans several dimensions, and the depth of review should match the vendor’s importance to your organization. While not every supplier requires the same level of scrutiny, a consistent set of risk categories helps finance teams evaluate vendors more objectively and avoid blind spots.

Financial stability and viability

A vendor’s financial health affects its ability to support your business over time. Declining revenue, mounting losses, or reliance on external funding can increase the risk of service disruptions or sudden contract changes.

Finance teams often review:

• Trends in revenue, profitability, and cash flow
• Credit ratings and insurance coverage
• Customer concentration or dependence on a small number of large clients
• Signs of distress such as layoffs, restructurings, or executive turnover

A SaaS vendor that depends heavily on a single enterprise customer, for example, may appear stable until that customer churns, leaving the vendor unable to meet service-level commitments.

Cybersecurity and data protection

Third-party access to systems and data remains one of the most common sources of security incidents. In 2024, 30% of breaches involved a third-party vendor, double the rate from the prior year, according to Verizon’s 2025 Data Breach Investigations report.

When a vendor handles sensitive data or integrates with internal systems, security controls become a primary focus. Reviews typically cover:

• SOC 2 or ISO 27001 reports
• Access controls, authentication methods, and encryption practices
• Incident response plans and breach notification timelines
• Results from penetration testing or vulnerability assessments
• Data center resilience, redundancy, and recovery commitments

Discussions about how a vendor manages incidents can be as revealing as formal documentation.

Legal and regulatory compliance

A vendor’s compliance posture directly affects your own exposure. This includes confirming that the vendor is legally established, properly licensed, and not subject to unresolved legal or regulatory issues.

Common areas of review include:

• Business registration and corporate structure
• Industry-specific certifications or approvals
• Privacy and data handling practices, including cross-border data transfers
• Sanctions screening and watchlist checks
• History of litigation or regulatory enforcement

Patterns of recurring disputes or regulatory findings often signal broader governance issues.

Operational capabilities and business continuity

Operational reliability determines whether a vendor can consistently meet expectations as your organization grows or changes. For finance teams, operational risk often shows up as delayed payments, system downtime, or breakdowns during close.

Evaluating operational maturity early helps avoid disruptions that are costly to unwind later.

ESG, ethics, and reputational risk

Vendors are an extension of your brand. Ethical failures, labor issues, or environmental violations can create reputational risk even if the vendor’s service performs as expected.

Teams increasingly look for:

• Public ESG commitments or sustainability reporting
• Anti-corruption and ethics policies
• Whistleblower or misconduct reporting mechanisms
• Adverse media coverage or unresolved controversies

A vendor under investigation for AML violations, for example, can create regulatory and reputational exposure for any organization that relies on them.

Subcontractor and fourth-party risk

Most vendors rely on their own network of subcontractors, cloud providers, and technology partners. These fourth-party relationships introduce risk that is often invisible without direct inquiry.

Consider:

• Which subcontractors support critical services
• How fourth-party risks are assessed and monitored
• Whether contracts require notification when key subcontractors change

Understanding these dependencies helps finance teams avoid surprises when an indirect failure disrupts a critical vendor.

The vendor due diligence process: A step-by-step guide

Vendor due diligence works best when teams follow a consistent, repeatable process. While the depth of review should scale based on vendor risk, using the same core steps helps ensure evaluations are thorough, comparable, and defensible.

In practice, lower-risk vendors may move through these steps quickly, while higher-risk vendors require deeper documentation, validation, and review. The structure stays the same; only the level of scrutiny changes.

Establish a vendor due diligence policy and ownership

A formal policy anchors the entire due diligence process. It sets expectations, promotes consistency, and clarifies who owns each stage of review.

That policy should define which vendors require due diligence, how risk tiers are assigned, and who is responsible for approval. In many mid-market organizations, finance owns program oversight and works closely with IT security, legal, and operations as needed.

Step 1: Categorize vendors by risk level

Assess how much impact a vendor could have on your organization if something goes wrong. Vendors that handle payments, financial reporting, sensitive data, or core systems typically require deeper review than those providing low-exposure services. Risk tiering helps teams concentrate effort where it matters most. Many organizations group vendors into high, medium, or low risk based on access, data sensitivity, and operational criticality.

Step 2: Collect information through questionnaires and documentation

With the vendor tiered, gather the information needed to understand its risk profile. Most organizations rely on standardized questionnaires and document requests to evaluate financial stability, security controls, compliance posture, and operational maturity.

Typical information requests include:

• Company structure, ownership, and leadership
• Financial statements, credit data, and insurance coverage
• Compliance certifications and privacy practices
• Security reports, access controls, and incident response plans
• SLAs, references, and support models

Incomplete or inconsistent documentation often signals risk on its own.

Step 3: Validate key information independently

Independent validation helps confirm accuracy and surface issues that questionnaires alone may miss. This step may involve reviewing public filings, checking for regulatory actions, validating certifications, assessing credit data, or speaking directly with customer references. For higher-risk vendors, teams often supplement internal reviews with third-party assessments.

Step 4: Evaluate and score vendor risk

Translate findings into a structured risk assessment. Scoring creates consistency and makes it easier to compare vendors across the same criteria. Many teams evaluate risk across domains such as financial stability, security, legal compliance, operational resilience, and reputational exposure. Even a simple low, medium, or high rating per category adds clarity and supports defensible decisions.

Step 5: Decide, document, and communicate outcomes

Use the assessment to reach a clear outcome: approve the vendor, approve with conditions, or reject the vendor due to unacceptable risk. Document the decision and any remediation requirements. Clear records support audits and make future reviews faster and more consistent.

Step 6: Reflect due diligence findings in vendor contracts

Make sure diligence results shape contractual protections. Higher-risk vendors often warrant stronger service level agreements (SLAs), breach notification requirements, audit rights, or termination clauses tied to risk events. Aligning contract terms with a vendor’s risk profile ensures due diligence leads to enforceable safeguards, not just documentation.

When to conduct vendor due diligence

Vendor due diligence is not a one-time exercise. It should occur at key points throughout the vendor lifecycle, particularly when risk exposure changes or new information becomes available.

Understanding when to reassess vendors helps finance teams stay ahead of issues rather than responding after problems surface.

Initial due diligence during vendor selection

Conduct due diligence after proposals are received but before contracts are signed. This timing allows teams to evaluate risk findings while they still have leverage to negotiate terms or walk away.

Many organizations assess multiple finalists before making a selection, using due diligence results to inform both vendor choice and contract structure.

Ongoing monitoring and periodic reassessment

Vendor risk evolves over time as businesses grow, change leadership, adopt new technologies, or expand into new markets. Ongoing monitoring ensures that earlier assessments remain accurate. High-risk vendors often require more frequent reviews, while lower-risk vendors can be reassessed less often:

Regular reviews help teams catch emerging issues early, particularly changes in security posture, financial stability, or operational performance.

Trigger events that require immediate reassessment

Certain events materially change a vendor’s risk profile and warrant a fresh round of due diligence, regardless of the normal review schedule.

Common triggers include:

• Leadership changes
• Mergers or acquisitions
• Security incidents or data breaches
• Extended outages or performance failures
• Major product or service changes
• Negative regulatory or media attention

When these events occur, relying on outdated assessments can leave organizations exposed to risks that no longer reflect reality.

Vendor due diligence checklist

A vendor due diligence checklist helps finance teams apply consistent standards across vendors, even when different stakeholders lead the review. While the depth of evaluation should scale by risk level, a shared checklist ensures critical areas are not overlooked.

Use this checklist as a baseline. For high-risk vendors, expect to request additional documentation or perform deeper validation.

Company information

• Legal entity name and corporate structure
• Ownership and parent relationships
• Executive leadership and key contacts
• Primary business locations

Financial documentation

• Multi-year financial statements
• Credit reports or financial risk indicators
• Insurance coverage and policy limits
• Revenue concentration or funding dependencies

Compliance and legal

• Regulatory licenses or industry certifications
• Privacy and data handling practices
• Sanctions screening and litigation history
• Material contract terms and obligations

Security and technology

• SOC 2, ISO, or equivalent security reports
• Access controls and authentication standards
• Incident response and breach notification procedures
• Business continuity and disaster recovery documentation

Operational performance

• Service-level agreements and performance metrics
• Customer references or case studies
• Support model and escalation paths
• Change management and release processes

ESG and reputational considerations

• Ethics and anti-corruption policies
• ESG disclosures or sustainability commitments
• Adverse media or regulatory findings
• Whistleblower or misconduct reporting mechanisms

Standardizing this checklist across teams makes vendor reviews faster, more defensible, and easier to audit, even as vendors and risk profiles change.

Common vendor due diligence mistakes to avoid

Even experienced finance teams run into challenges when building or scaling a vendor due diligence program. Limited resources, fragmented ownership, and growing vendor ecosystems often lead to shortcuts that increase risk over time.

Mitratech’s 2025 Third-Party Risk Management Study found that nearly 70% of TPRM programs are understaffed and, as a result, organizations actively assess only about 40% of their vendor population on average. That gap between vendor volume and review capacity makes it easy for risks to slip through unnoticed.

Common pitfalls include:

• Treating all vendors the same, regardless of risk level
• Accepting vendor-provided information without independent verification
• Failing to reflect due diligence findings in contract terms
• Limiting reviews to initial onboarding instead of monitoring over time
• Excluding key stakeholders such as security, legal, or operations
• Skipping documentation of decisions and risk acceptance
• Overlooking subcontractors and fourth-party dependencies

Avoiding these mistakes does not require a perfect process. It requires clear ownership, realistic scoping, and consistent follow-through, especially when teams are managing far more vendors than they can reasonably assess in depth.

How to streamline vendor due diligence for your finance team

Vendor due diligence can become time-consuming without the right structure. Finance teams often manage dozens or hundreds of vendors, each with different risk profiles and review requirements. Streamlining the process helps teams stay thorough without slowing procurement or vendor onboarding.

Create standardized templates and workflows

Standardizing questionnaires, scorecards, and approval workflows reduces decision fatigue and improves consistency. When every vendor is evaluated using the same baseline materials, reviews become easier to compare and simpler to audit.

Templates also make it easier to train new team members and reduce dependence on individual reviewers’ judgment.

Decide how to resource due diligence efforts

Not every organization handles vendor due diligence the same way. Smaller teams often manage reviews internally, while larger organizations may supplement in-house efforts with external specialists for security or compliance reviews.

A blended approach is common: finance teams coordinate most evaluations, while third parties assist with deep technical assessments for high-risk vendors. This helps balance speed, cost, and depth of review.

Use technology to support vendor management

Technology can help centralize vendor data, automate questionnaires, and track approvals over time. For finance teams, vendor management automation is especially valuable during renewals and periodic reviews, when manual tracking tends to break down.

Tools that integrate vendor records with procurement and accounts payable systems also help prevent unapproved vendors from entering workflows.

Ramp supports centralized vendor tracking, approval workflows, and real-time visibility into spend. The platform flags duplicate vendors, highlights cost-saving opportunities, and helps teams maintain clean documentation.

Integrate due diligence into financial workflows

Vendor due diligence is most effective when it is embedded into existing financial processes rather than treated as a standalone exercise. Connecting due diligence outcomes to procurement, AP onboarding, and contract management ensures risk assessments influence day-to-day decisions.

When due diligence is part of normal workflows, teams are less likely to bypass reviews under time pressure.

Building smarter vendor relationships through better due diligence

Vendor due diligence helps you make better decisions at every stage of the vendor lifecycle. A clear, structured checklist gives your team the tools to evaluate vendors based on facts, not assumptions.

When you align your checklist with your company’s risk appetite, tailor it by vendor type, and involve the right stakeholders, you create a process that scales. You also reduce friction between teams and avoid delays in procurement, compliance, and legal reviews.

When done well, due diligence helps you move faster without sacrificing quality. It strengthens trust with vendors, improves contract outcomes, and ensures regulatory readiness across the board.

With Ramp, vendor due diligence does not stop after onboarding. The platform tracks vendor spending trends, monitors contract terms, and even flags underused software seats through integrations like Okta. This turns due diligence into a continuous process that helps reduce waste, improve compliance, and strengthen vendor relationships over time.