Commercial lending is the backbone of business growth, but it also carries significant legal and financial risks for lenders. Poorly drafted documents, unclear collateral descriptions, and gaps in due diligence can expose a financial institution to loss—especially when a borrower defaults or when competing creditors appear. With over 25 years representing banks and financial institutions, David Lutz, J.D., MBA, brings a practical, risk-focused approach to structuring and documenting commercial loans. Below are key strategies lenders can use to protect their interests and strengthen enforceability throughout the life of a credit relationship.
1. Start with Clear, Comprehensive Loan Documentation
The most effective way to reduce lender risk is to ensure loan documents are accurate, complete, and consistent. Ambiguity is the enemy of enforceability. Every loan package should include:
- A well-crafted loan agreement outlining repayment terms, covenants, events of default, reporting requirements, and remedies.
- A detailed security agreement identifying all collateral and specifying the debtor’s rights and obligations.
- Accurate collateral descriptions, especially when dealing with UCC Article 9 collateral categories such as equipment, inventory, accounts, general intangibles, or deposit accounts.
In David Lutz’s practice, many disputes arise not from borrower misconduct but from preventable drafting gaps. Investing time up front in precision drafting often saves years of costly litigation later.
2. Strengthen Secured Creditor Rights Through Proper Perfection
Even the most comprehensive security agreement is ineffective unless the lender properly perfects its security interest. Under UCC Article 9, the method of perfection varies depending on the type of collateral:
- Filing a UCC-1 is required for most assets, such as accounts, equipment, or inventory.
- Possession is necessary for negotiable instruments, money, or tangible chattel paper.
- Control is required for deposit accounts, investment property, and electronic chattel paper.
Financial institutions often assume that filing alone ensures priority, but UCC disputes frequently arise when competing creditors either filed earlier, filed correctly while another filed incorrectly, or perfected by a superior method such as control. As David Lutz notes, many lenders lose priority not because they lacked rights—but because the documentation and filings did not match statutory requirements.
3. Use Deposit Account Control Agreements (DACAs) to Protect Cash Collateral
Cash is one of the most valuable forms of collateral, but also one of the easiest for a debtor to dissipate. A Deposit Account Control Agreement gives the lender “control” under UCC Article 9, which ensures:
- Priority over other secured creditors
- The ability to direct funds in the account upon default
- Stronger protection in insolvency scenarios
David Lutz regularly drafts and negotiates DACAs for lenders in Minnesota. He emphasizes that a DACA is essential when a borrower’s operating account is a significant part of the collateral package. Without it, another creditor—or even the depositary bank—may have superior rights to the funds.
4. Include Protective Covenants and Reporting Requirements
Well-crafted covenants allow lenders to monitor borrower performance before a problem becomes a crisis. Protective covenants may include:
- Minimum financial ratios
- Debt-service coverage requirements
- Restrictions on additional borrowing
- Limits on asset sales or transfers
- Regular delivery of financial statements or tax returns
These mechanisms give lenders early warning signs and the opportunity to work with a borrower before collateral value erodes.
5. Prepare for Enforcement Early—Before Default Occurs
Even in strong loan relationships, lenders should document remedies clearly and understand enforcement pathways such as:
- Repossession of collateral
- Foreclosure on real property
- Appointment of a receiver
- Setoff rights
- Litigation or confession of judgment remedies (where permitted)
As David Lutz emphasizes, enforcement becomes significantly more efficient when the lender’s rights have been preserved throughout the life of the loan.
Conclusion
Reducing risk in commercial lending requires more than standard-form documents. It takes proactive structuring, precise drafting, and a strong understanding of UCC Article 9. With decades of experience advising financial institutions, Attorney David Lutz provides lenders with practical, business-focused legal strategies that protect their interests and reduce exposure throughout the lending process.
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