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What Is A Small Business Loan Underwriting Process And How it Works?

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Title: What Is A Small Business Loan Underwriting Process And How it Works?


1
WHAT IS A SMALL BUSINESS LOAN UNDERWRITING
PROCESS AND HOW IT WORKS?
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2
What Is the Loan Underwriting Process?
A loan underwriting process is used by a lender
to evaluate a borrowers eligibility for a loan
based on an analysis of their credit, capacity,
and collateral, and for what loan amounts,
interest rates, and repayment terms a borrower
qualifies for. The lender compile a list of
essential documents to verify borrowers
identification, credit history, and assesses the
financial health including revenue, cash flow,
equity investment, liquid assets and other risk
factors.
Understanding the loan types and attached terms
may seem like a never-ending task especially when
youre new to applying for a loan. Whether you
need a small business loan or a mortgage for your
home, getting ready for the loan underwriting
process is the key, and that involves a lot of
paperwork and intricate process.
Understanding the loan underwriting process can
be a valuable endeavor just like understanding
your financing options. Lenders use this process
to decide whether they approve a loan application
or not. And, if youve an opportunity in the loan
underwriting process, its best to get prepared in
order to improve your chances of getting a YES
on your loan application.
Borrowing can be an intimidating undertaking,
especially for startups. While getting into the
financing, its best to have realistic
assumptions of whats involved in the process so
as to make an intelligent sound decisions about
the future of your business. Understanding a loan
underwriting process is the first step towards
securing a loan.
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3
Commercial Loan Underwriting
Whether you need a fast loan for working capital
or equipment financing for renovation or
upgrades. its valuable to understand how your
eligibility is gauged. No matter what loan type
you request or choose, the steps will always be
the same you inquire, make a loan application
and provide needed documentation. Then, youll be
evaluated for an offer, and finally have the best
funding option based on your financing needs.
This is how a commercial loan underwriting
process started.
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4
Itinerary for the Underwriting Process
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5
Step 1 Evaluating Qualifications
The first step in the process involves a
conversation with a lender generally over a phone
call. Unless youve provided basic information
about yourself and your business in the loan
application, youre required to give an overview
of your business financials and purposes. Using
this information, the lender will conclude the
best small business loan options for which youre
likely to qualify for based on your business
objectives. Here is a list of few questions that
a lender might ask
Does your business have any existing debt?
Once you answer to all these questions, youll
most likely get a recommendation on the most
suited loan option based on these answers. Before
getting into the underwriting process, take time
to analyze how the recommended financing options
will conform into your future business plans.
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Step 2 Concluding the Loan Application
Once the loan options look promising for your
business, next step is to conclude your loan
application by planning and understanding your
businesss financial goals to make the small
business loan underwriting process serene. Fill
your loan application by providing your
credentials such as credit history, time in
business, and annual revenue.
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7
Step 3 Compiling Important Documentation
Compiling your important documentation is your
next step in the loan underwriting process. The
requirement of these documents will vary from
lender to lender as well as the loan product
youre applying to secure. In case of alternative
lenders, your application is presented to
different potential lenders who will require
different documents for their loan underwriting
process, based on the loan type they offer.
Your drivers license copy, voided business
check, ownership proof, credit history, three
months of business bank statements and personal
tax returns.
For Invoice Financing
Accounting software comprising invoicing records.
For Equipment Financing
The best thing about working with alternative
lenders is the least requirement of paperwork in
order to secure financing. Moreover, underwriting
process for many alternative lenders only require
access to the accounting software to get the
needed information. Here is the list of documents
you have to provide for different loan products
Good reputation, voided business check, drivers
license copy and a quote for the equipment.
For Merchant Cash Advances
Your drivers license copy, a voided business
check, and business bank statements for four
months.
For Short-Term Lines of Credit
Three months of accounting software records
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8
Underwriting Process For the SBA Loans and Bank
Loans
If youre approved for an SBA loan or a
traditional bank loan, youre likely to gather a
lot of paperwork. But, its worth compiling those
additional documentation including the following
  • Your certificate of good standing
  • Tax Statements for property, business, sales, and
    others
  • A Business brief
  • Business licenses, permits, and approvals
  • Six months payroll records
  • Real estate title deeds
  • accounts receivable
  • Business leases
  • Personal real estate title deeds as collateral
  • Disclosure of any unfavorable governing, tax, or
    enforcement actions
  • Disclosure of any liens against business property
  • Patents, copyrights, and other intellectual
    property rights

Getting approval for an SBA loan or a bank loan
is time-intensive and paper-intensive process.
And the lenders may ask for more documentation
than those mentioned abovebecause they want to
ensure theyre not accepting redundant risk. But,
if youre in search for lower interest rates with
longer repayment terms, its worth to try the
complicated business underwriting process with
these loans.
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9
Step 4 Acknowledging Underwriters Follow-Up
Requests
There could be a possibility that you might have
neglect the information crucial to procuring a
small business loan. Similarly, some lenders
might require some additional documents if
theyre unable to foresee the clear picture of
borrowers and the potential risk theyre
considering.
It might feels infuriating when a lender come
back for more documentation especially after
youve done everything already. Remember, a
follow-up request from the lender isnt unusual,
and doesnt mean that youre getting denied on
the loan! Be confident and attentive whenever a
follow up request is made.
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10
Step 5 Obtain Final Loan Offers
Again, based on your lender and the loan product,
you might get funding in days or could be
hanging in for a few weeks or even months. After
youve quickly done with the application process
and have the essential documents ready, youll
know the financing options available and choose
from them. Its time to decide which loan option
works best for you, and that initiate the small
business loan underwriting process.
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11
How Traditional Loan Underwriting Process Works
Traditionally, lenders used different approaches
and pieces of information to estimate the risk of
making loan decision. They usually request a lot
of paperwork to approve or deny a loan
application. The only downside of traditional
approach of underwriting process is that approval
was based on lenders decision and not technology.
And, a lender decision to approve or deny could
make it lengthy and subjective for both the
borrower and lender itself.
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12
How Latest Loan Underwriting Process Works
With the advancement in technology, lenders are
using latest technology and human expertise to
make financial decisions. Whether its a fintech
or peer-to-peer technology, there are many ways
in which lenders are making loans easier for
borrowers, and painless to pay off, with a smooth
experience overall. They use specific measures to
examine the credit risks making the business
loan underwriting process much easier.
Here are the specific measures lenders consider
while evaluating the potential credit risk
  • Borrower personal and business credit scores
    (score of 600 is considered good)
  • A cash cushion to avoid insufficient-fund
    penalties and overdraft fees
  • Positive cash flow statement of four months
  • Minimal current debt load
  • The loan amount
  • A borrower ability to repay

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13
How to Prepare for the Loan Underwriting Process
Before you make a loan application, some
additional measures can help position your small
business favorable to the lender. By making easy
adjustments in your day-to-day processes
beforehand can help you get a loan approval
easily. These factors wont guarantee you
approval but will influence the lenders to
perceive your business as financially stable.
Here are few things you need to have a grasp on
Plan strategically and apply for funding during
your peak season when you have the most stable
cash flow and your businesss financial status
will appear worthwhile to lenders. While
preparing for the small business loan
underwriting process, cautiously track your
expenses and defer any large expense that can
considerably change your cash flow.
While preparation for the future business
financing needs, get your tax write-offs in order
by discussing it with a tax specialist. By not
reducing much on your annual taxes, you can
improve your cash flow for the lenders.
Having a business checking account is necessary
for business. If youve a business checking
account along with your personal account, a
lender will perceive youre serious about your
business and its finances.
If your frequency of deposits is consistent, and
foreseeable, youll be considered stable. This
can be achieved by creating a flexible payment
plan for suppliers and major clients to ensure
frequent deposits in to your bank account. You
can also improve your banking habits by simply
transferring money from other sources into your
bank account frequently. They want to see an
active business account.
Maintaining a minimum balance as a cushion into
your bank account is another way to improve your
chances of approval. Having an average daily
balance of 2,500 over the last three to four
months is suggested good. Having this cushion can
help you manage your cash flow flux.
Business Checking Account
Minimum Bank Balance
Annual Revenue
Frequency of Deposits
Cash Flow
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14
The Conclusion
Preparing for the small business loan
underwriting process can seem byzantine,
unconditionally. There are so many variables
involved and making a decision can be sometimes
overwhelming. 
To make the process easier, get help from
networks of expertsand look for someone you can
depend upon. Their knowledge not only give you
the understanding and accelerate the process, but
also help you make an intelligent decision! The
current lending marketplace is expanding with
more and more experts joining the industry, and
their skills set can matter in getting you the
funds you need with an reasonable small business
loan.
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