“Construction lending is fraught with risk. The failure of a contractor on a job can bring serious problems to a construction project and ultimately getting repaid. Successful lenders understand the need to be able to recognize the characteristics of a high risk contractor.”
CRE Lending Coach
The High Risk Contractor
The Credit Officer’s Perspective
Credit officers know that contractors have a long history of going out of business. These failures generate many, many problems in construction lending. Therefore, credit officers have developed a profile of the risky contractor. The contractor that must be carefully analyzed before the bank takes on credit risk.
To begin, credit officers perceive that the longer a contractor is in business, the lower the risk. As a general rule, they like to see that a contractor has been in business more than 5 years.
Additionally, they watch for when a contractor starts to show the following signs. The more of these signs being observed, the greater the risk of failure.
Signs of High Risk
1.Takes on a Project that is Dramatically Larger than Past Projects
2. No Experience in the Geographic Area of a Project
3. A Project is a New Type of Construction for the Contractor
4. The Contractor is Displaying Poor Management Skills
5. Failing to Properly Evaluate the Profitability on Projects
6. Displays Poor Accounting and Billing Management
Coach is not intended to provide legal advice. Consult your legal counsel with respect to your state and local law.
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