Risks Inherent in Lending

Excerpted from "What Every Lender Needs to Know About Working Capital Lending"

There is absolutely no way to eliminate risk in lending. Even the riskless loan, which is cash for cash collateral, can still fall victim to some level of risk that may or may not be successfully mitigated. Unforeseen or outside anomalies may create "hidden" risks. These may be things such as natural disasters, liquidity crises such as market meltdowns, or perhaps a regulatory change that automatically renders a particular type of loan invalid and unsecured.

Several different things can come into play with regard to lending, especially when you look at risk. The successful mitigation of risk ensures profitability in your lending portfolio and must be addressed in every working capital loan.

Risk in lending can be defined as any occurrence that prevents or impairs the fulfillment of a lending contract, and can generally be categorized insurable versus non-insurable.

Because lending risk cannot be completely eliminated but merely mitigated, it is essential that the operational system a lender operates for its lending adequately assess and price for risk. This leads to a whole discussion on why risk is critical in the analysis to determine the type of reward that should be received from a working capital lending portfolio.