In all cases, the bank wants the same assurance: They want to know that they're going to get their money back, with interest. In the case of residential and personal loans, most of the risks are fairly obvious and relatively easy for both banks and consumers to reason about. Here are some example risks:
- You might lose your job, for any number of reasons, or your existing income might be too low to meet the bank's expected repayment schedule (with interest).
- A disaster might destroy or ruin the collateral.
- You might incur (or already have) some other debt, and find yourself unable to pay for both.
It is relatively easy for banks to account for all of the above risks, and other risks associated with private lending, and come up with an interest rate that balances those risks appropriately with the rest of the bank's position. That's why they can just give you a magic number (the credit score) which summarizes most of this information. It's not perfect, but over large numbers of debtors, it averages out well enough for practical use.
In commercial lending, this is a great deal more complicated, because there are many more risks associated with commercial endeavors:
- You might have a poor business plan that looks good on paper.
- You might have a good business plan that you are unable to competently execute.
- You might (unintentionally) violate some law or regulation, and the government might decide to shut you down.
- As in the consumer case, you could incur additional debts; however, it is far more common for businesses to incur significant amounts of debt compared to individuals, and so this is much more complex to assess in practice.
- You might do everything right (as far as anyone can tell), but the market just doesn't like your business and it fails anyway.
To roughly approximate these risks, banks will look to your experience running the business, or similar businesses in the past, as well as the amount of money in the company and the amount of debt it currently owes.