Underwriting Small Business Loans: How Does It Work?

Obtaining a small business loan, or any loan, often involves encountering the terms “underwriter” and “underwriting.” You might have heard phrases like “Your loan application is in underwriting” or “The underwriter is reviewing your application.” While this step is crucial in the loan process, it can sometimes feel like your application disappears into a mysterious void, leaving you uncertain about its progress.

Let's shed light on the underwriting process for small business loans, understanding its significance, how it operates, and ways to enhance your loan application for a smoother experience.

The Key Concerns of Underwriters

Though not explicitly stated, underwriters focus on three critical questions when evaluating small business loans:

• Can your business comfortably repay the loan? In other words, does your business possess the financial capacity to handle the loan and manage regular debt payments?
• Will your business indeed repay the loan? This query delves into the reliability of your business to make timely and consistent periodic payments. Some businesses may have the means but struggle to maintain a consistent payment schedule.
• How prepared is your business for unforeseen circumstances? Underwriters consider whether you have contingency plans and can continue making loan payments if unexpected challenges arise.

When an underwriter reviews your loan application, they seek answers to these fundamental questions. The presence or absence of these answers significantly impacts the loan approval decision. Knowing what an underwriter looks for allows you to include all pertinent information that helps address these crucial concerns.

Remember that every lender has unique criteria for underwriting small business loans. While no universal standard applies to all lenders, they generally assess similar aspects of your business. However, different lenders may weigh certain factors differently during their evaluation process.

Decoding the Information Underwriters Seek in Loan Applications

Gone are the days when underwriters manually reviewed each loan application. Nowadays, most business lenders employ automated processes driven by proprietary algorithms and formulas to aid their underwriting small business loans decisions. Despite automation, human underwriters still play a pivotal role in deciding whether to accept or reject a loan application.

When underwriters evaluate your loan application, several key factors come under their scrutiny:

1. Business Revenue

The monthly or annual revenue of your business is a vital consideration. If your revenue cannot support regular loan payments, approval becomes unlikely. Many lenders have a revenue-to-loan ratio, typically lending up to 10% of your annual revenues or 50-100% of your monthly gross revenue. Existing business loans or credit lines may influence this amount.

1. Personal Credit Score

For most small business owners in the United States, their credit score affects the overall creditworthiness of their business.

Different lenders have varying credit score requirements; traditional lenders might seek scores in the 700s, while online lenders may accept scores as low as 500. Remember that lower personal credit scores often result in higher financing costs.

1. Collateral

While not all lenders demand collateral, many banks and the Small Business Administration (SBA) do. The SBA might not insist on full collateralization but will require all available collateral.

Online lenders might apply a general lien on business assets. Personal guarantees on small business loans are common, even with traditional banks.

1. Additional Sources of Repayment

Underwriters may explore other income streams you could use to repay the loan, such as a guarantor, insurance policy, or supplementary income from another job.

1. Personal Equity

Underwriters may show interest in how much your funds are invested in the business. Demonstrating personal investment in the business signifies the commitment and a vested interest in the venture's success.

1. Debt Service Coverage Ratio

This calculation involves assessing your business's income concerning its existing financing. A ratio below 1.25 could hinder obtaining further financing.

1. Debt-to-Asset Ratio

Particularly relevant when no collateral requirement exists. It ensures you have sufficient assets to cover the loan in case of default.

1. Loan-to-Value Ratio

Pertains to loans requiring collateral, indicating that the collateral's value is equal to or ideally exceeds the loan amount by at least 20%.

1. Net-Worth-to-Loan-Size Ratio

This ratio compares your assets' value to the loan amount, demonstrating your capacity to afford the loan.

While specific underwriting requirements vary among lenders, being well-prepared with this information and able to respond accurately to any queries will ensure you are ready to navigate the underwriting small business loans process confidently.

Key Red Flags that Underwriters Watch Out For

Understanding what underwriters typically seek in loan applications is essential, but it's equally crucial to be aware of potential deal killers that could lead to automatic application denials. Here's a list of common red flags that underwriters pay close attention to:

1. Unreported Recent Business Cash Advances or Loans: Concealing cash advances or loans obtained recently but not disclosed in the month-to-date (MTD) bank activity can raise concerns and jeopardize approval.
2. Excessive Negative Days in MTD Bank Activity: Many negative days in the MTD bank activity printout might raise suspicion and affect the underwriting small business loans decision.
3. Criminal Background History: A criminal record could be a deal breaker, depending on the lender's policies and the severity of the offenses.
4. Undisclosed Tax Liens or Unresolved Tax Liabilities: Unreported tax liens or those without a payment plan can be considered signs of financial instability.
5. Recent Bankruptcy or Ongoing Bankruptcy Proceedings: A bankruptcy filed within the last six months or ongoing bankruptcy can lead to denial of application. However, a discharged bankruptcy beyond six months may not always disqualify a borrower, depending on the lender.
6. Unsatisfied Excessive or Large Judgments: Unresolved judgments that indicate financial disputes or liabilities may raise concerns.
7. Less than 50% Ownership (depending on the lender): In some cases, ownership stakes below 50% might be viewed unfavorably by certain lenders.
8. Major Drop in Revenue: A significant decline in business revenue may raise doubts about the company's financial stability and ability to repay the loan.
9. Negative Landlord References: Negative references from landlords, such as months of unpaid rent or eviction proceedings, may be detrimental to the application.
10. Undisclosed Defaulted or Restructured Business Loans or Cash Advances: Concealing past defaults or restructured business loans and cash advances can damage your loan prospects.

Accuracy is of paramount importance when completing your loan application. Attempting to deceive the underwriter with an error-riddled or fraudulent application is unlikely to go unnoticed. Moreover, underwriters are skilled at discovering and verifying data, making it essential to provide accurate and verifiable information.

It's evident that data plays a central role in loan decisions, but it must be precise and corroborated. An adept underwriter will diligently uncover and verify the information provided to ensure a fair and informed decision-making process.

Tips for Navigating the Small Business Loan Underwriting Process

If you're seeking a small business loan, you can implement a few strategies before and during the underwriting small business loans process to increase your chances of approval. These tips will help ensure a smooth process and secure your financing.

1. Channel All Income to Your Business Bank Account – To demonstrate stability and sufficient cash flow, deposit all your income into your business bank account. That includes credit card sales and cash transactions. Doing so signals lenders that you have the necessary funds to meet your loan payments. Keeping your business bank account positive throughout the underwriting small business loans process is also important.
2. Prioritize Liquidity – Liquidity is crucial in small business loan underwriting. Aim to showcase a strong reserve of liquid assets, such as cash, stocks, accounts receivable, and inventory. Having visible liquidity reassures lenders that you can handle unexpected challenges and repay the loan comfortably.
3. Maintain Consistent Revenue Streams – While sporadic revenue increases are welcome, lenders prefer to see a consistent flow of revenue. That demonstrates the stability and reliability of your business's income. Strive for steady growth and reliable revenue sources to instill confidence in lenders.
4. Ensure Accuracy in Documentation – Lenders meticulously review documents, cross-check information, and verify accuracy. Attempting to mislead or hide information is unlikely to succeed. Reporting your debt, revenue, and bank accounts accurately is crucial. Any discrepancies discovered by the underwriter could seriously impact your approval chances. Transparency is key.

By following these tips, you'll be better prepared to navigate the small business loan underwriting process. Remember to maintain accurate records, demonstrate liquidity, and present consistent revenue streams. These steps will increase your likelihood of success and help you secure the financing your business needs.

The Underwriting Small Business Loan Process Steps

The process of underwriting small business loans can vary in duration, depending on the type of lender you choose. For instance, online lenders are generally known for quicker processing than traditional banks. It's crucial to communicate with your lender and inquire about the expected timeframe, allowing you to stay prepared and follow the tips mentioned earlier to increase your approval chances throughout the underwriting process.

The underwriting small business loans process typically involves three distinct steps:

1. Application

This initial step involves submitting your loan application and all the required documentation, such as financial statements, credit reports, business plans, and collateral details.

Ensuring your application is accurate, complete, and supported by relevant data is essential. The lender will use this information to evaluate your creditworthiness and ability to repay the loan.

1. Review

During this phase, the lender's underwriter will examine your application and the accompanying documents meticulously. They will verify the accuracy of the data provided, assess your credit history, analyze your business's financial health, and evaluate your ability to meet loan obligations.

The underwriter aims to determine the level of risk associated with granting you the loan and assess whether you meet their lending criteria.

1. Approval

After a thorough review, the underwriter will decide regarding the loan application. It will likely receive approval if your application meets the lender's requirements and demonstrates satisfactory creditworthiness and repayment capacity.

On the other hand, if the underwriter identifies significant risks or issues in your application, it may lead to a rejection or require modifications to the loan terms.

It's crucial to remember that the underwriting small business loans process plays a crucial role in determining your loan's outcome. By providing accurate and verifiable information, maintaining a strong credit history, and demonstrating the ability to repay the loan, you enhance your chances of receiving approval for your small business loan.

Additionally, staying proactive and communicating with your lender throughout the process can help you navigate potential challenges and ensure a smoother and more efficient underwriting small business loans experience.

Before Submitting Your Loan Application

Take the opportunity to consult a reliable financial advisor and address the underwriting small business loans questions mentioned earlier. Ensure no potential deal-breakers are hidden within your application before engaging with a lender or submitting it to an underwriter.

While having the answers and adequate preparation might not guarantee approval for the small business loan you seek, it will undoubtedly enhance your chances and enable you to identify the loan that best suits your business needs.

Navigate Your Underwriting Small Business Loans Process and Secure Your Ideal Loan with GoKapital!

At GoKapital, we understand that obtaining the right financing for your business or real estate ventures can be challenging. Each lender has its specific criteria, making it crucial to explore multiple options before settling on a deal. If you've faced rejection for a business loan or wish to explore different possibilities, we encourage you to contact GoKapital.

As a leading private lender, GoKapital is dedicated to helping small businesses thrive by offering tailored financing solutions. Whether you require a business loan to expand your operations or real estate financing for property investments, we are committed to presenting you with the best available options in the market.

Our team of experienced financial experts is well-versed in the underwriting process and will guide you through every step. If you find the underwriting process overwhelming, consider seeking advice from financial advisors or loan specialists. They can provide valuable insights and help you present your application in the best possible light.

GoKapital is dedicated to assisting you throughout the loan application process, from gathering the necessary paperwork to presenting a compelling case to our underwriters. Our mission is to help your business thrive, and we are committed to finding the financing solution that best suits your needs. Reach out to us today, and let's take the next step together on your path to success.

Ready to take your business to the next level? Contact GoKapital today and secure the financing you need to grow and succeed. Our team of financial experts is here to guide you through the underwriting process and find the best loan options tailored to your specific needs.

Don't wait any longer – seize this opportunity and make your business dreams a reality. Get started now by visiting our website or giving us a call.