Red Flags: How to Spot High-Risk Borrowers in Commercial Lending

In commercial lending, identifying high-risk borrowers early can save banks millions. Based on 15+ years of underwriting experience across Asia and North America, we’ve compiled 36 warning signs that signal financial instability, fraud potential, or mismanagement. Whether you’re a lender, investor, or credit analyst, these red flags are critical for risk assessment.

Top 10 High-Risk Borrower Traits

(Condensed from 36 indicators for actionable insights)

1. Suspicious Financial Behavior

🔴 Irregular Cash Flows: Unexplained large transfers, hidden bank accounts, or inconsistent revenue patterns.
🔴 Discrepancies in Books: Inventory/AR doesn’t match transactions; accounting staff frequently replaced.
🔴 Personal & Business Funds Mixed: Loans used for personal interest payments (embezzlement risk).

2. Questionable Management Practices

🔴 “Ghost” CEO: Rarely onsite, unresponsive to calls (“Only he contacts you”).
🔴 Chaotic Operations: Fancy titles but no systems; high employee turnover.
🔴 Overleveraged: Maxed-out credit cards + multiple recent credit inquiries but no new loans.

3. Personality & Lifestyle Clues

🔴 Unrealistic Self-Image: Talks Wall Street but runs a failing diner; “friends with political elites.”
🔴 Erratic Demeanor: Nervous tics (e.g., shaky legs, avoiding eye contact).
🔴 Lavish Spending: Luxury cars amid office disarray; lifestyle exceeds business income.

4. Structural Business Risks

🔴 Industry Decline + Reckless Expansion: Diversifying into unrelated, speculative ventures.
🔴 No Clear Loan Purpose: “Just give me the money—I’ll figure it out.”

Case Study: The “Too Good to Be True” Borrower

Scenario: A manufacturing CEO claimed 300% YOY growth but:

• Had no local assets (family lived abroad).
• Books showed $2M AR—yet clients denied transactions.
• Employees quit within months; CFO changed 3x/year.
  Outcome: Loan denied. Business collapsed 6 months later amid fraud charges.

Actionable Due Diligence Tips

1. Verify Cash Flows: Cross-check bank statements with tax filings.
2. Visit Premises: Dusty inventory? Empty offices? Major red flags.
3. Interview Staff: Low morale = hidden problems.
4. Check Personal Credit: Multiple late payments? Walk away.