OCC Updates Venture Lending Guidance for National Banks and Federal Savings Associations

The Office of the Comptroller of the Currency ("OCC") updated its supervisory expectations on the risk management of commercial loans to companies in early or late stages of corporate development.

In the OCC Bulletin, the regulator clarified that it does not discourage banks from lending to startup and expansion-stage companies, provided that management ensures these loans fit within the bank's risk appetite and are appropriately underwritten. The OCC defined "venture loans" as commercial loans to companies that may not yet have sustainable positive cash flow or sufficient collateral to support conventional repayment, distinguishing these from standard asset-based loans or government-guaranteed facilities.

To address the high probability of failure associated with new business ventures, the OCC emphasized that banks cannot rely on uncommitted future equity funding or "implied guarantee[s]" from investors as a primary source of repayment. The regulator warned that while recurring revenue is a positive factor, it is not equivalent to sustainable repayment capacity, and banks must use realistic financial projections that account for a borrower's "cash burn" rate rather than relying solely on optimistic growth scenarios. 

The OCC outlined specific operational standards, requiring banks to maintain independent risk control functions and to differentiate clearly between venture loans and conventional commercial loans. It further specified that unless a borrower has controlled cash collateral specifically pledged to cover the debt, a borrower's declining cash balance is generally considered a secondary, rather than primary, source of repayment. 

The OCC said the guidance is effective immediately and explicitly rescinded the regulator's prior bulletin on the same topic from 2023. The OCC placed no specific time limits on the relief, but required banks to continuously maintain capital commensurate with the level of risk and to classify assets appropriately if well-defined weaknesses appear.