Believe it or not, there are a lot of pitfalls in commercial loan pricing, and in this blog, we’re going to discuss them, and how you can avoid them.

Many banks today use a spread-based pricing model instead of a risk-adjusted return on capital (RAROC) model. Approximately 15% of banks who have under $1 billion in assets use either an in-house or a purchased loan pricing model, and of those, the number that currently use a true RAROC model is insignificant.

Another thing to remember is that it costs a bank as much to originate a loan for $100,000 as it does to originate a loan for $1 million — this is because many banks have fixed origination loan costs. This means, of course, that larger loans are more profitable for banks. In fact, for many banks, a loan that is less than $500,000 often results in a negative ROE for the bank.

Finally, bear in mind the most important pitfall: even if a loan is over $500,000, it’s not exactly profitable for a bank. In fact, the vast majority of loans lose money because of the various administrative costs and other risks involved in the lender profile.

The Hurdle Group provides banks with a competitive advantage through better pricing of their commercial loans.  As a banker, you can increase your profitability on your commercial loan portfolio by optimizing your loan rates and terms. For more information about our services, or to request a consultation with one of our experts, contact us today. We are pleased to serve bankers in the USA.