When applying for a small business loan, you must meet all the requirements to qualify. And that includes issuing financial documents such as profit and loss statement and tax returns. Your lender’s underwriter will then review your application to determine if you’re eligible for the loan.
What is a Small Business Loan Underwriting?
Loan underwriting is a procedure that a lender follows to review and approve your loan application. The lenders do that to determine the level of risk they are taking on you. If you don’t have all the loan requirements, the underwriter will not approve your request.
Both mortar-and-brick banks and nonbank lenders have loan officers (underwriters) who analyze loan applications. The process may take longer if not computerized. When it comes to online lenders, the underwriting process is automated and may take a few hours or days to get the money you requested.
What’s the Purpose of Loan Underwriting?
The primary objective of loan underwriting is to determine your ability to pay off the loan. During the process, the underwriters go through your financial history (both personal and business) to ensure that they can recover all the money in any case you default payment.
During underwriting, lenders often go through your past financial information for a reason. In a nutshell, let’s take a look at some of the objectives of loan underwriting.
1. To Determine the Level of Risk
When reviewing your loan application, an underwriter often evaluates your credit score to measure your risk level.
2. To Minimize Losses when You Default Payments
If your credit score is low, the lenders may charge high-interest rates to avoid a significant loss when you fail to pay off the entire loan.
3. To Reduce Underwriting Costs
The costs of underwriting depend on the duration the lender takes to review your loan application. Most lenders have automated this process to minimize the expenses it takes.
How Small Business Loan Underwriting Works
The duration between loan application and loan approval varies depending on the type of lender you are working with, the amount of money you are borrowing, and the documents you have issued.
Most online lenders have automated underwriting process and can, therefore, approve your loan application in a few minutes. However, they may charge higher interest rates than traditional banks.
Now that you have an insight on what loan underwriting entails let’s look at how it works.
How to Get a Business Loan
1. Loan Application
When taking out a loan from a traditional bank, you can either call the lender or visit the bank in person to submit your application. That may take more time because you’ll have to move to the bank and meet the loan officer.
When working with an online lender, you can submit your application by filling forms online. The process is simple and has few requirements. Moreover, online lenders have underwriting software that takes a shorter time to process your application.
2. Review of Application
Once you have submitted your application, the lender’s underwriters will review all your documents to determine if you are eligible for the loan.
When applying at a traditional bank, the underwriter must check your past cash flow. That is done to ensure that you will not be a liability when it comes to payments. The process may take longer than expected.
Online lenders take a shorter time to review your loan application, especially if you have all the requirements. That is because they have software which utilizes algorithms that can analyze all the loan variables within a short time.
Both conventional banks and online lenders may offer call services to their clients. The loan officers may call you to ask a few questions regarding your application. You can also call them to seek further clarification.
3. Loan Approval
With a conventional bank, the underwriters must write a report once they have reviewed your application. The report states the findings including the reasons why you should get approval or not, and the proposed interest rates.
The report has to pass through the bank committee for approval. The committee can either adjust the loan amounts and interest rates and send it back to the underwriter or approve the report right away.
Online lenders can approve your application in a few minutes. Once you’ve got approval, you will receive money in your bank account within a few hours or days.
Factors that Loan Underwriters Consider
Small business loan underwriters look at numerous things including your financial history when reviewing your loan application. All these factors vary depending on the type of lender you are borrowing from and the amount of loan you are taking out.
1. Business Revenue
When applying for a small business loan, you must prove that your business will generate enough income to pay back the loan. It may not be easy to get the loan if your business revenue is too low to pay off the debt.
2. Credit Score
A good credit score gives you a better chance of getting a small business loan. You must have a personal credit score of 680 and above to qualify for large loans in banks. When using your business credit score, it has to be 75% or more for you to get the loan.
When applying for a secured small business loan, your lender must evaluate the value of the property you are using as collateral. That is to ensure that it is worth the loan you are borrowing.
4. Alternative Sources of Income
Lenders must always consider other sources of funds to repay the loan when you default payments. Such sources include personal and government guarantors.
You can quickly get a small business loan from a bank when you have an existing rapport with the bank. You should open an account with your local financial institution and build your reputation. That will help you get a loan fast when there shall be a need.
When looking for a small business loan, it is essential to consider the lender’s underwriting process. That is because every lender follows different procedures when reviewing loan applications. Some lenders have automated loan underwriting while others use manual underwriting. With the help of this website, you will get the best lenders in the market.