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Commercial borrowers are facing increasing difficulty securing financing from traditional banks, as institutions tighten their standards for issuing loans. From stricter credit assessments to reduced loan amounts and shorter repayment terms, banks are applying greater scrutiny to every deal. This shift is not random; it’s a calculated response to growing economic uncertainty, rising regulatory demands, and concerns over market sectors like commercial real estate. For businesses seeking capital, understanding what’s driving this tightening trend is essential to navigating the current lending environment. In this blog, we examine a few of the main factors driving the tightening of bank commercial lending standards. Plus, we explore some of the AI-powered features in AXIS by AIO Logic that can help banks analyze potential deals in an accurate and timely manner.

Economic Uncertainty Is Driving Caution

One of the primary forces behind tighter lending standards is heightened economic uncertainty. Ongoing inflation, interest rate hikes, supply chain disruptions, and fears of a potential recession are making banks more cautious. Lenders are deeply risk-averse during volatile periods, and economic turbulence increases the likelihood that borrowers may default. Higher interest rates have made debt more expensive for businesses, raising their repayment burdens and reducing their borrowing capacity. In response, banks are tightening credit to minimize risk exposure, especially for industries seen as particularly vulnerable to a slowdown.

As banks make decisions regarding industries to prioritize or de-prioritize, it’s important that they have real-time and dynamic insights into the performance of loans in various industries. With automated portfolio stratification and reporting in AXIS by AIO Logic, banks have those insights at the tip of their figures. In addition to standard stratification attributes (e.g., state or industry), AXIS users have the choice to dynamically stratify loan data by any captured data point. Time dimensionality is also included in stratification functionality so users can stratify as of today, or as of a historical date, or compare portfolio stratification over time.

Regulatory Pressures Are Rising

Tightening standards are also a response to increasing regulatory scrutiny. Since the banking turmoil of 2023, including several high-profile regional bank failures, regulators have stepped up their oversight, especially around commercial loan portfolios and balance sheet risk. Federal agencies now require stronger risk management and higher capital buffers, particularly for banks with exposure to commercial real estate or uninsured deposits. As a result, many institutions are pulling back on riskier lending, limiting the size and scope of commercial loans to ensure compliance and preserve financial stability.

With banks facing increased regulatory pressure, it’s crucial that they have a comprehensive, 360-degree view of their loan portfolio at all times. Thanks to AXIS’s robust suite of automated portfolio reporting and analytics, banks can always have a clear picture of how their portfolio is performing. For example, with AXIS’s static pool and collection analysis functionality, users can view historical balance, principal, and interest curves by vintage, by loan, or by account. This data is dynamic and real-time, allowing users to seamlessly obtain robust and timely analytics. Additionally, AXIS automates tracking of key portfolio performance KPIs including total yield, cumulative charge-off rate, and default rate.

Flight to Quality Borrowers

As uncertainty grows, banks are increasingly adopting a “flight to quality” approach—prioritizing loans to the most financially stable and low-risk borrowers. This means businesses with strong cash flow, long operating histories, and solid collateral are more likely to be approved, while newer or more leveraged companies may be sidelined. Even profitable businesses in cyclical or highly competitive industries are finding it harder to secure capital, as banks concentrate their lending on a narrow band of low-risk borrowers. This shift reduces portfolio risk for banks but leaves many worthy borrowers without access to traditional financing, pushing them to explore alternative lenders or delay growth initiatives altogether.

While banks may decide to prioritize loans to low-risk borrowers, accurately analyzing borrowers that fit that description can sometimes be a challenge. If reliant on manual analysis, decisions could be based on outdated financial information or the biases of the analyst. Thankfully, this risk is mitigated when using AXIS by AIO Logic, as our automated credit assessment functionality can analyze a wide range of data points (e.g., financial statements, transaction history, market data) in real time to assess the creditworthiness of borrowers. This allows for a more accurate and dynamic underwriting process, reducing the bank’s credit risk.

Weaker Borrower Financials

The financial health of many borrowers has deteriorated over the last few years, putting further pressure on banks to raise their standards. Inflation has eaten into profit margins, labor shortages have driven up costs, and persistent economic headwinds have made it harder for businesses—especially small and mid-sized ones—to maintain strong balance sheets. Lenders are seeing more applications from borrowers with weaker cash flow, thinner margins, and higher leverage. As a result, banks are requiring more documentation, stronger covenants, and in some cases, additional collateral before they’re willing to approve a loan.

As banks require stronger documentation and covenants for their commercial loans, managing loan covenants through manual processes becomes increasingly difficult. To help address this challenge, AXIS by AIO Logic automates the tracking and monitoring of loan covenants. In AXIS, all loan covenants are parametric and centrally tracked in the Loan record. The Covenant type is chosen from a list (e.g. financial statements, DSCR) and parameters (e.g. frequency, due date) are entered. For financial covenants, (e.g. EBITDA %, Fixed Charge Coverage), the testing benchmark is also added. From that point, all subsequent covenant tracking and monitoring is automated.

Technology Enables More Granular Risk Management

Advancements in credit analytics and automation have also contributed to tighter underwriting. Banks are increasingly using automated systems to evaluate borrower risk in real time, allowing them to identify and respond to pockets of elevated risk more quickly. While these tools improve efficiency, they also make it easier for banks to apply more selective criteria and deny borderline applicants who might have been approved under traditional methods. With better data and predictive modeling, banks are less likely to take chances, particularly in uncertain market conditions, and more likely to set terms that reflect precisely calculated risk.

As mentioned earlier in this blog, AXIS by AIO Logic provides lenders with powerful financial spreading and analytics capabilities. AXIS’s financial spreading functionality is available out of the box and gives users the option of spreading financial statements through AXIS’s spreading interface, through upload, or through integration with borrower accounting systems. Once financials are spread into AXIS, the platform automatically performs vertical, horizontal, and trend analysis to calculate 42 financial ratios and score borrower financial health. As a result, lenders can make timely and informed decisions regarding the creditworthiness of potential borrowers.

Conclusion

Banks are clearly shifting toward a more risk-conscious approach to commercial lending, driven by a mix of economic, regulatory, and technological factors. This means that borrowers can expect stricter criteria, longer approval timelines, and more conservative deal structures. Businesses that depend on financing must be better prepared—with cleaner financials, clearer business plans, and stronger collateral positions—or else they may need to turn to non-bank lenders and private credit markets to meet their capital needs. In today’s environment, understanding the “why” behind tighter lending is the first step toward adapting and thriving despite the challenges. If your bank or lending firm is seeking ways to analyze potential deals in an accurate and timely manner, feel free to contact us today to schedule an intro call and learn more about AXIS’s financial spreading and analytics functionality, along with everything else AXIS has to offer!