Understanding Credit Risk: Why This Matters For Your Commercial Loan

When seeking a commercial loan for your business, it is critical to understand the various factors that make up a financial institutions decision of whether or not to take on a loan. Credit risk is the possibility that a bank will lose some of its value if its outstanding loans are not able to be paid back.

Considering that the majority of a bank’s assets are wrapped up in loans of varying types, it is no surprise that when a financial institution is considering a client for a commercial loan that it would assess the risk associated with taking on such a liability. But how do banks evaluate the various credit risks that different clients represent and determine which are safe over which ones present a risk that is not worth taking?

One of the main ways that banks assess the risk that is associated with a borrower that is seeking a commercial loan is through their capacity to pay back the loan. Whether this capacity comes from revenue generated from their business or from other sources, such as collateral, this is a main factor in determining whether the risk is worth the reward for the lender. Banks understand that a certain level is involved in lending, regardless of the client, but lending funds to a business entity that has no way of paying the bank back is a massive credit risk.

Another key component that is important to understand about credit risk assessment is the importance of the borrower’s history of repayment. This applies to both personal and business debt. If the business (or the individual) has a habit of not paying on time or has many delinquent marks against their accounts, this could signal to the bank that the risk associated with granting a loan is much higher than possible return. After all, the bank doesn’t want to loan out $100,000 if it suspects that most of it will enter into default.

These are just three of a variety of factors that enter in to a lending institution’s assessment of the credit risk of the borrower when considering a commercial loan. While there are some common factors in assessing a credit risk, it is important to understand that each loan is an individualized decision, which is one of the reasons that the steps necessary to secure such a loan are so many and so arduous.

What should you do if you present a high credit risk for a commercial loan?

Don’t give up! There are a number of ways to creatively minimize your credit risk. One such method is by maximizing your loan to value ratio. By increasing the level of personal equity toward the loan, it will help to convince lending institutions that you are less likely to default on the loan. They figure that if you have some personal skin in the game that you are less likely to walk away from your financial responsibilities. The professional team at Level 4 Funding is well equipped to help you adopt a personalized loan strategy to increase your chances of successfully securing a loan.

Dennis Mortgage Broker ArizonaDennis Dahlberg Broker/RI/CEO/MLO
Level 4 Funding LLC  Private Hard Money Lender
Arizona Tel:  (623) 582-4444
Texas Tel:     (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701


About the Author:  Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.