: Diabetic mouth ulcers are a pathological condition of the oral mucosa leading to increases in susceptibility to infection and prolonged wound healing time. Still, there is a lack of natural formulations for treating this condition. Our principal objective was to formulate solid lipid nanoparticles (SLNs) that contained (marshmallow) (M.) extract with clove oil (CO.), subsequently integrated into a collagen sponge for enhancing stability, solubility, sustained release, antimicrobial efficacy, and healing power when targeting diabetic oral ulcers. : A factorial design of 34 trials was established to evaluate the influence of lipid concentration (A), SAA concentration (B), lipid type (C), and SAA type (D). The optimized M-CO-SLNs was selected using Design Expert, the based Poly dispersibility index (Y2), zeta potential (MV) (Y3), and encapsulation efficiency (%) (Y4). The optimized SLNs were integrated into a collagen sponge matrix and tested for their antibacterial and antifungal efficacy against , , and , respectively. Moreover, they were tested for their wound healing power in a diabetic mouth ulcer model. : The optimized formula (Run 16: 5% lipid concentration, 4% SAA concentration, capric acid) demonstrated P.S (110 ± 0.76 nm), ZP (-24 ± 0.32 mV), PDI (0.18 ± 0.05), and EE% (90 ± 0.65%.). The optimized M-CO-SLNs formula was incorporated into a cross-linked collagen sponge and showed superior antimicrobial efficacy, an increased swelling ratio, and was effective in an in vivo oral ulcer study, as evidenced by ELISA biomarkers, gene expression analysis, and histological analysis. : M-CO-SLNs embedded in collagen sponges is a promising therapeutic formula for clinical application against diabetic mouth ulcers.