Commercial credit supports business growth, but every loan a financial institution extends carries measurable risk. When documentation is incomplete, collateral is vaguely described, or statutory perfection steps are missed, lenders can find themselves unexpectedly exposed—particularly in default scenarios or priority disputes. With more than 25 years advising banks and commercial lenders, David A. Lutz, J.D., MBA, emphasizes disciplined documentation and proactive risk management at every stage of the lending relationship.

1. Build a Strong Foundation with Clear, Integrated Loan Documents

Effective risk mitigation begins with documents that are accurate, consistent, and free of ambiguity. A well-structured loan file typically includes:

1. A comprehensive loan agreement setting repayment terms, covenants, reporting obligations, and lender remedies.

2. A security agreement that clearly identifies collateral and defines the debtor’s duties.

3. Precise collateral descriptions—especially when referencing UCC Article 9 categories such as accounts, inventory, equipment, and general intangibles.

According to Lutz, many disputes could be avoided entirely if lenders invested more time in initial drafting. Small inconsistencies can escalate into significant legal battles when enforcement becomes necessary.

2. Perfect the Security Interest Correctly to Preserve Priority

Even the best-drafted security agreement offers little protection unless properly perfected. Under UCC Article 9:

1. Filing a UCC-1 financing statement is required for most collateral types.

2. Possession is needed for instruments, money, or tangible chattel paper.

3. Control is essential for deposit accounts, electronic chattel paper, and investment property.

Priority conflicts often arise when one creditor perfects using the correct method while another relies on filing alone. Lutz regularly sees lenders lose priority not because they lacked rights, but because the underlying perfection steps did not comply with statutory requirements.

3. Use Deposit Account Control Agreements to Secure Cash Collateral

Deposit accounts frequently represent a significant portion of a borrower’s collateral base—and without a DACA, lenders may have no priority claim to the cash. Establishing control through a DACA provides:

1. Superior priority over competing security interests

2. Authority to direct account funds upon default

3. Enhanced protection during insolvency or receivership proceedings

Lutz notes that lenders who rely solely on a security agreement—without a DACA—risk subordination to other creditors or even the depository bank.

4. Implement Covenants That Provide Early Warning Signals

Financial and operational covenants allow lenders to monitor borrower performance throughout the loan term. Useful provisions include:

1. Minimum liquidity and financial ratio requirements

2. Debt-service coverage standards

3. Restrictions on taking on additional creditors

4. Limitations on asset transfers or sales

5. Regular delivery of financial statements or tax filings

Covenants ensure lenders receive timely information, helping them intervene before a borrower’s financial distress becomes unmanageable.

5. Document Enforcement Options Before Problems Arise

Even in cooperative lending relationships, lenders should understand and document enforcement mechanisms clearly. These may include:

1. Repossession or sale of collateral

2. Judicial or nonjudicial foreclosure

3. Appointment of a receiver to protect assets

4. Exercising setoff rights

5. Litigation or confession of judgment remedies (where allowed)

Lutz emphasizes that enforcement proceeds more smoothly when lenders have consistently documented their rights and maintained compliance throughout the loan’s lifecycle.

Conclusion

Managing risk in commercial lending requires more than standardized forms. It demands a proactive approach, technical precision, and a deep understanding of secured transactions. With decades of experience representing financial institutions, Attorney David Lutz helps lenders structure and document credit facilities in ways that strengthen enforceability and reduce exposure long before issues arise.