If you’ve never heard the phrase ‘loan underwriting’ before, it refers to the investigation that lenders make to assess whether you might default on repayment. A business loan underwriting process will vary depending on the lender, whether they be traditional banks, credit unions, or online lenders.
As a business owner, it’s useful to have a firm understanding of how lenders might investigate your risk profile. This can ensure that you prepare stronger applications, which raises your odds of approval.
What Is Business Loan Underwriting?
The business loan underwriting process evaluates your trustworthiness as a loan recipient. Lenders look into your business and its financial profile to determine whether or not they can safely dispense loans for a return.
Common areas of interest tend to be financial statements, credit history, operational data, and your personal finances. Underwriting can be done either manually, via automation, or a combination of the two, depending on the lender.
Typically, traditional underwriting tends to be slower and involves intensive paperwork. Online lenders can make the process more streamlined and transparent, allowing you to apply with more confidence.
Key Factors Lenders Evaluate During Underwriting
While each lender has its own custom underwriting checklist, some factors tend to be universally considered. These include:
- Credit History: Lenders might look at both your business and personal credit history. They might check for payment lapses and repayment history to determine eligibility.
- Business Financials: Your business’s core finances, such as your profit and loss statements, balance sheets, and bank statements, will be examined carefully. This is why having an accountant examine them beforehand is ideal.
- Time in Business: More business experience means more data for lenders to evaluate.. Traditional lenders, in particular, are very hesitant to lend to new businesses that have only been open for a few months.
- Cash Flow and Revenue Trends: Many lenders analyze money trends in the form of revenue and cash flow. Good cash flow implies that monthly repayments can be anticipated.
- Collateral or Personal Guarantees: These are most often required by traditional lenders. In case you default on a loan, the lender might take business equipment or other assets that will serve as payment.
- Loan Purpose: Some lenders also prefer to know to what purpose the loan will be used. If you are using the money to support business growth or stability, your odds of approval may be slightly higher.
How the Underwriting Process Differs by Lender Type
| Lender Type | Typical Underwriting Process | Key Considerations |
| Traditional Banks | 1. Thorough examination of financial documents 2. Expects high credit scores 3. Expects sufficient collateral 4. Approval may move through several stages | 1. Underwriting can take weeks. 2. Newer businesses are at a disadvantage when compared to established ones with a history of good finances. |
| SBA Loans | 1. Requires both SBA (Small Business Administration) approval and bank approval 2. May involve personal background checks 3. Requires a detailed business plan 4. Extensive financial paperwork | 1. Potentially lower interest rates 2. Considerable time requirement 3. Paperwork expectations can be overwhelming for new businesses. |
| Online and Alternative Lenders | 1. Automated or hybrid approach 2. Focuses on overall business health like revenue and cash flow 3. Less emphasis on rigid metrics like credit scores or collateral | 1. Funding can be fast (within 24 to 72 hours) 2. Documentation requirements are much lower than those of other lender types |
How Long Does the Business Loan Underwriting Process Take?
Timelines can change drastically depending on the lender. Below are some typical figures:
- Banks and SBA: 2 to 6 weeks.
- Credit unions: 1 to 3 weeks.
- Online lenders: 24 to 72 hours.
Tips to Improve Your Approval Odds
While there’s no guaranteed formula for getting approved, you can tweak your application and prepare in a way that improves your odds. Here are some ideas:
- Maintain organized, up-to-date financial records: The small things often make a big difference. If a lender has to comb through unorganized data, it can make a bad impression. Try to keep documentation like bank statements and tax returns as organized and up-to-date as possible.
- Monitor and improve business and personal credit: This is particularly important when dealing with traditional lenders who excessively focus on credit scores. If there are outstanding loans in your business or personal life, paying them off can help boost your credit scores.
- Clearly define how the loan will be used: A specific write-up about fund usage is always a good idea, regardless of lender type. Not all lenders require it, but it’s good to have something prepared that explains the details if they’re curious about what you’ll spend the money on.
- Avoid cash flow issues or negative balances in business accounts: Failing to keep cash flow and balances in the green is another bad look you want to avoid. It doesn’t give a lender confidence if they don’t see your business growing. Try to sort out cash flow and existing debt before the business loan underwriting process begins.
Be Prepared, Not Surprised
It can be intimidating when a lender starts a business loan underwriting process. However, preparing for the investigation is a valuable experience and will help you in the future as well if you ever need more funding.
Also, it’s important to note the distinction between traditional and alternative underwriting. Traditional lenders focus on metrics like cash flow and business history. Online lenders like Fast Business Financial do not require extensive documentation and can often get you access to working capital faster and easier.
FAQs
What does business loan underwriting mean?
The business loan underwriting process is used by lenders to assess the risk of lending to a business. They look at several aspects of your finances to determine if loan approval is worth the risk.
Will bad credit automatically disqualify me?
For traditional lenders like banks? Yes, bad credit can be a cause for disqualification. However, other lenders like Fast Business Financial evaluate cash flow and overall business performance in their underwriting process.
How long does the underwriting process take?
With traditional lenders, you can expect it to take weeks. However, with lenders like Fast Business Financial, it can be as little as 24 to 72 hours.
What documents should I prepare in advance?
Each lender will have different requirements, so find out how your specific lender will evaluate your application. In general, try to keep recent bank statements, tax returns, and a fund usage plan to explain how the loan will be used.
Can I get a loan with no collateral?
Yes. Many online lenders, including Fast Business Financial, will offer you unsecured loans based on revenue and time in business. Traditional banks tend to expect some form of collateral.
Experience Simple and Quick Loan Underwriting and Approval with Fast Business Financial Today
Do you need funding quickly and can’t wait weeks for the underwriting process? Fast Business Financial offers streamlined small business loans with fewer requirements and faster funding. Apply today!