Welcome to The Green Zone Briefing: Part 4 of Confidence Cracks: The Banking Industry Is Changing the Rules. In this edition we break down one of the most important but least discussed shifts happening inside banks right now: internal borrower reclassification. These behind the scenes adjustments determine which companies get approvals, which ones hit credit committee delays, and which ones get pushed into tougher structures.

If you missed the earlier installments, you can read more about Part 1 of Confidence Cracks: The Consumer Sentiment Warning Sign For Your Capital Strategy, Part 2 of Confidence Cracks: Access Under Pressure, and Part 3 of Confidence Cracks: The Banking Industry is Changing the Rules. Each of these Briefings set up the foundation for what you are about to read today.

Most borrowers assume that stable performance equals a stable internal rating. That assumption no longer holds. Banks are reassessing industry volatility, customer concentration, liquidity buffers, and structural weaknesses in ways they were not doing three years ago. Even companies performing well on paper are learning that their internal classification can move without warning.

According to the Federal Reserve’s Senior Loan Officer Opinion Survey, the percentage of banks tightening commercial lending standards remains elevated as institutions reset internal frameworks to account for heightened market uncertainty. This is happening across industries regardless of individual company strength.

“Many borrowers are getting downgraded without doing anything wrong. The rules of what banks consider strong are changing faster than business owners realize."
— Stacey Huddleston, CEO, Green Zone Capital Advisors™

These reclassifications rarely come with early communication. Borrowers typically find out when terms get tighter or when a renewal suddenly becomes a longer, more intrusive process. We recently outlined why renewals feel different now in our Green Zone Briefing on why your next renewal may not be as simple as you expect.

Why This Matters

Strong financial performance is very subjective to commercial banks, and no longer guarantees that your bank likes what they see. Banks are now stress testing industries and capital structures instead of just assessing P&L results. Companies with rising customer concentrations above 25% or cyclicality in demand are seeing silent shifts in how they are categorized.

Renewals take longer when classifications move. Borrowers expecting a routine conversation are discovering that lenders are treating maturities like fresh facility requests. We covered this shift in detail in our recent breakdown of renewal expectations in today’s environment.

Pricing changes follow classification changes, not relationship history. Even long standing clients are seeing wider spreads and tougher terms once their internal rating is lowered.

Waiting reduces your leverage. Banks do not notify borrowers when their internal rating moves. By the time you notice, the structure has already changed. This is why we emphasize capital readiness early in our capital preparation guidance for middle market companies.

Classification shifts determine future borrowing capacity. Even if your current facility survives, expanding your structure or negotiating better terms becomes much more difficult in a higher risk bucket.

Real World Insight

A mid-sized industrial company approached their annual renewal believing they were in excellent standing. Revenue was strong, margins held steady, and cash flow improved. Yet their bank informed them that due to industry softening, their rating was reclassified as elevated risk. The result was a reduced advance rate, shorter maturity, and monthly reporting requirements. Nothing changed in their financials. The bank’s internal model changed.

We recently highlighted similar lender behavior patterns in our broader Green Zone Briefing series on credit market shifts.

What You Should Do Right Now

Map your business through the lens your bank loan committee uses. Look at your industry, customer mix, liquidity, and working capital behavior, not just your earnings.

Run stress tests that mirror the questions lenders are asking today. We covered these specific stress testing expectations in our insight on why lenders are asking new questions in 2025.

Review your recent lender interactions. Subtle questions about volatility or concentration often signal internal friction.

Ask your bank for a conversation about how your industry is being viewed well before your business loan renews or matures. Do not wait for the loan renewal call to find out your risk category has shifted.

Build more options now. Adding a second bank or exploring private credit before renewal season creates leverage. Borrowers without options are absorbing the toughest changes.

Green Zone Insight

Internal reclassifications are the quiet force shaping credit decisions in 2025. Banks are prioritizing downside protection over relationship history. Borrowers who assume their risk rating is unchanged will be caught off guard when pricing widens, advance rates fall, or approvals slow.

At Green Zone Capital Advisors we underwrite businesses using the same lens credit committees use. We stress test your borrowing base, analyze structural risks, and prepare your capital story long before you enter your lender’s process. We also break down these shifts across our full library of Green Zone Briefings so clients know what to expect before it happens.

For companies that have not reviewed their structure since 2022, the window to act is narrowing quickly. Lenders are adjusting their frameworks in real time. Borrowers who are proactive will retain negotiating power. Borrowers who wait will absorb the consequences.