What can go wrong with an off-chain loan?
What can go wrong with an off-chain loan?
Off-chain (RWA) loans are real credit, so they carry real risks. Knowing what they are is the first step to judging whether a structure handles them well.
The borrower doesn't pay
This is credit risk, the most basic risk in lending. A business can lose a customer, run short of cash or fail. Good structures limit it with careful underwriting, spreading exposure across many borrowers, collateral, and buffers that absorb losses before investors do.
The loan isn't what it seems
The documents might be wrong, duplicated or fake. An invoice might be financed twice. This is why verification against independent data, rather than trusting a spreadsheet, matters so much.
The money gets stuck
Repayments might be delayed, paid to the wrong account or held up by a dispute. Controlled collections accounts and clear legal rights over the cash reduce this risk.
The lender or servicer fails
If the company managing the loans gets into trouble, investors need their claim to be separate from that company's own creditors. Legal structures such as separate, bankruptcy-remote entities, and security over the collateral, are designed for exactly this.
The information is late
In traditional private credit, investors often learn about problems months later from a quarterly report. Late information doesn't change what happens to the loans, but it does change how quickly anyone can respond.
What to look for
Before investing, ask: how are borrowers checked, how are documents and payments verified, where does the cash go, what protects investors if the manager fails, and how often can you see the data? No structure removes risk. A good one makes it visible.
Related: Credit risk math, Bankruptcy remoteness and Security packages: UCC-1s and DACAs.