The Loan Underwriting Process: What It Is and How to Hack It
What Is the Small Business Loan Underwriting Process?
Reputable lenders use both technology and human expertise for the business loan underwriting process. They will look at inputs such as your business and personal credit score, cash on hand, revenue, profit, cash flow, current debt, and the loan amount requested to understand the amount of debt your business can afford to pay back.
If you’re new to applying for a loan, you’re not alone if just about everything seems overwhelming—understanding the types of loans to choose from and the loan terms that come with them can seem like a never-ending task. Whether you’re looking for a mortgage for your home or invoice financing for your small business, you’ll also need to prepare for the loan underwriting process, which often involves piles of paperwork and complicated steps.
Just like understanding your best business loan options, understanding what’s involved in loan underwriting is a worthwhile endeavor: Loan underwriting is the actual process that lenders undergo to decide whether or not they approve your application for a loan. And when you have a window into the loan underwriting process, you can be best prepared—and maybe even improve your chances of getting approval.
So, yes, borrowing might seem daunting at first, especially to first-timers. But if you’re new to the world of finance, having realistic expectations of how things will proceed is essential for making sound decisions about the future of your business. Knowing about the ins and outs loan underwriting process is the first step.
What Is Loan Underwriting?
Underwriting a loan means evaluating whether or not an applicant is eligible for a loan and, if they are eligible, what loan terms this applicant qualifies for. So, the decisions that loan underwriters make through the loan underwriting process won’t just be yes-or-no, but rather will determine what loan amount, interest rates, and repayment term lengths qualified borrowers receive.
What Is Commercial Loan Underwriting?
Now, loan underwriting for business loans will follow this general loan underwriting definition. That said, the commercial loan underwriting process will evaluate both your own personal finances and your business finances. As result, the commercial loan underwriting process will often be a thorough, document-heavy, and time-consuming process.
Every Borrower Goes Through Loan Underwriting
Though loan underwriting will be a universal experience for all borrowers—both consumer and business—the commercial loan underwriting process is a whole other beast beyond consumer loan underwriting. As such, this guide to loan underwriting will hone in on loan underwriting for business loans to shed light on this complicated process.
Zooming in on Commercial Loan Underwriting
Whether you’re looking for equipment financing to modernize your shop or a short-term loan to boost your working capital, your business needs cash. Knowing that some type of business loan application is in your future, it’s useful to know how you’ll be evaluated for eligibility.
Regardless of the type of loan product you choose or the size of your funding request, the required steps are the same. You inquire, you apply for a loan, you provide documentation. Then they evaluate, they make an offer, and you finally make the best choice for your business borrowing needs. This is when the commercial loan underwriting process begins.
Business Loan Underwriting Timeline: From Inquiry to Funds in Hand
The specific timing of all the individual components that comprise the business loan underwriting process from start to finish can vary widely. The timeline is contingent on lots of variables, but most notably the amount of the loan you’ve been approved for and what type of loan it is, plus the type of documentation you have available to provide the loan underwriters. How quickly you can gather your documentation generally plays a big role in how fast the business loan underwriting process comes together.
For example, while many short- and medium-term loan products from online lenders can be approved and funded within a matter of days, the application process for a bank or SBA loan might stretch out for weeks or even a few months, especially if you take your time gathering the necessary documents.
Step 1: Screening for Business Loan Qualifications
The borrower’s journey through the business loan underwriting process generally starts with a phone call with a loan representative.
Depending on the lender, loan broker, or lending marketplace, you might have already provided some information about your business online before you begin your chat.
If not, expect to answer a few questions to serve as an overview of your business financials and objectives. These will help whomever you’re working with figure out your best matches for small business loans based on the type product you’re likely to qualify for, plus which options are the best fit for your business goals.
You’ll be asked things like:
- What does your business do?
- How much funding are you looking for?
- How do you plan to use the loan funds?
- Do you have any existing business debt?
- How strong is your personal credit score?
- What amount of annual revenue is your business bringing in?
- How quickly do you need to obtain business loan funds?
- What are your interest rate and repayment expectations?
Based on your answers, you’ll most likely receive a recommendation as to whether you’re a good fit to apply for a business loan—and if so, which specific loan products the representative recommends.
Important: Remember that as much as you’re being asked questions, this is your opportunity to get curious, too! Don’t be afraid to ask critical questions about how loan rates and terms are determined—as well as questions about the loan representative’s commission or payment structure to make sure that the advice they’re giving is truly in your best interest and not just their own.
By the end of this call, you might need some time to consider how these business funding options fit into your upcoming business plans before you’re ready to move on into the loan underwriting process.
Step 2: Completing the Loan Application
Once you feel good about the type of loan product (or products) look promising for your business’s financing needs, that’s when you enter the actual loan application and documentation phase. Here’s where a little advanced planning and a working knowledge of your business’s financial goals will go a long way into making that business loan underwriting process smooth. Filling out your application for a loan will involve self-reporting your credentials—like your credit score, your time in business, and your business’s annual revenue. Ideally, to fill out your business loan application, you’ll simply take the data that you used for step 1 and use it to fill out a formal application.
Step 3: Providing Documents Necessary for Loan Underwriting
The next step in loan underwriting will be compiling the documentation necessary to prove all of the stats you self-reported in your business loan application. Documentation requirements will vary among online lenders and traditional bank lenders, and again depending on the loan product you’re hoping to secure. And if you’re using an online lending marketplace, your loan specialist may be presenting your application to several possible lenders. These lenders often require different documents for their loan underwriting process, depending on the type of product they offer.
There are many fantastic things about working with alternative lenders, one being that applicants will be required to provide much less documentation to secure financing with them. In some cases, alternative lenders will simply require your accounting software login for their underwriting process.
For these loan products, you won’t need much to go full speed ahead into the business loan underwriting process once you’re approved:
Typical Documentation to Underwrite Short-Term Lines of Credit
To underwrite a short-term business line of credit, loan underwriters will typically only need:
- Three months of accounting software records
Typical Documentation to Underwrite Short-Term Loans
Loan underwriting for a short-term business loan will typically require:
- A copy of your driver’s license
- A voided business check
- Proof of ownership
- A credit pull
- Three months of business bank statements
- Personal tax returns
Typical Documentation to Underwrite Invoice Financing
Underwriting invoice financing will typically require:
- Accounting software containing invoice records
Typical Documentation to Underwrite Equipment Financing
If you’re applying for equipment financing, the loan underwriting process will require:
- Your certificate of good standing
- A voided business check
- A copy of your driver’s license
- An equipment quote
Typical Documentation to Underwrite Merchant Cash Advance
You’ll simply need to hand over the following docs to underwriters if you’re applying for a merchant cash advance:
- A copy of your driver’s license
- A voided business check
- Four months of business bank statements
Typical Documentation to Underwrite Multi-Year Term Loans and Lines of Credit
If you’re looking for a term loan, you’ll need to show a bit more documentation before you can enter the business loan underwriting process:
- Past one or two years personal and business income tax returns
- At least three months of business bank statements (sometimes more if you run a seasonal operation)
- Business organization documents to prove ownership (articles of incorporation, LLC agreement, or partnership agreement)
- P&L statement (or income statement, whatever you’d like to call it!)
- Business balance sheet
You can see why it helps to be prepared ahead of time—it’s a lot of stuff. But if you have this info on hand, your application can be completed and lenders can begin to formulate offers in as few as two to three days.
Underwriting SBA Loans and Bank Loans Will Require Even More Docs
But wait, there’s more! There’s more paperwork required if you’re qualified for a loan through your local bank, or a highly sought after SBA loan. For those great terms, though, it’s worth furnishing the additional documentation regarding your business’s finances, and also your personal finances, too.
You’ll likely need to pull:
- Your certificate of good standing
- Property, business, sales, municipal, and potentially other tax statements
- Business overview and history
- All relevant business licenses, permits, and approvals
- Payroll records (previous six months)
- All title deeds to real estate owned by the business
- Evidence of accounts receivable
- Leases on all business premises
- Title deeds on personal real estate that can be used as possible collateral
- Full disclosure of any adverse regulatory, tax, or government enforcement actions (aka, did you break any rules?)
- Disclosure of any liens against business property
- Patents, copyrights, and other intellectual property rights
Heads up that there could be more—these lenders are rigid during the loan underwriting process because they want to make certain that they’re not taking on unnecessary risk. (You might have gathered, then, that the traditional loan or SBA loan product can be a lengthy process.)
But, if the idea of lower interest rates and longer repayment terms appeals to you, you’ll want to ride out the often complicated business underwriting process with these loans. Just keep in mind that from the time they receive your application request until the time you receive the cash in your hand can sometimes be as long as six to eight weeks.
Step 4: Responding to Your Loan Underwriter’s Follow-Up Requests
Even the most well-prepared business owner can overlook information critical to securing a business loan. Likewise, lenders might want more documentation if the information they’ve initially asked for doesn’t give enough of a picture of the borrower and the potential risk they’re weighing.
It might be frustrating to have a lender or loan specialist come back to you with requests for additional paperwork, especially after you’ve combed through so many records already. Just know that a follow-up request isn’t uncommon, and doesn’t mean that you’re going to get denied a loan! Especially in the case of SBA loans, where lenders examine everything with a very fine-toothed comb.
Stay positive—if they want more information, they’re still interested in your candidacy as a borrower.
Step 5: Going Through Final Loan Underwriting and Receiving Offers
Again, depending on the type of lender you work with and loan product you’ve chosen, you might go from initial application to having the credit you need in days. Or you could be hanging in for a few months.
If you’ve gone through the application process quickly and have your documentation on hand, you’ll know if you have options for business financing—you may even have several offers to choose from. You make your choice here, picking the financing that’s right for your company, and that kicks off the business loan underwriting process.
How Lenders Make Business Loan Underwriting Decisions
The Old Loan Underwriting Process
Historically, lenders have used slightly different tools and combinations of information to evaluate the risk of making business loans. The lender collected lots of documentation hoping all that paperwork would contain reasons to approve or deny a loan request.
The drawback with that method is that the final decision was left up to a human, not technology. And you know human nature—that could make things sometimes long and arbitrary for both the lender and the borrower.
The Better, Newer Loan Underwriting Method
In the current lending climate, though, the field is a lot more level. Lenders depend more on specific criteria to evaluate potential credit risks. Reputable lenders use both technology and human expertise for the business loan underwriting process.
So, while you’re waiting for those offers to roll in, take a look at some of these figures that the lender will also be evaluating:
- Credit scores, both business and personal (600+ is a good target)
- A cushion of cash in the bank ($2,500+ average daily balance is another good figure)
- Positive cash flow for the previous four months
- Minimal current debt load
- Loan request amount
- If the borrower can reasonably cover the repayment amounts
These are the numbers that define your business’s ability to take on the debt you’re requesting. So, if your numbers don’t look promising, you cannot “sell” your business loan to the lender. The numbers speak for themselves. (And never, ever fudge them—the lender will know.)
Hacking the Business Loan Underwriting Process
Before you even get to the actual loan application, you can take some additional actions that just might position your business in a more favorable light to potential lenders.
Owners who’ve successfully conquered the business loan underwriting process will tell you that you can make some easy process adjustments in your day-to-day in advance of applying for a loan. Although these hacks certainly aren’t required components of your loan package, they certainly have an influence on how lenders will perceive your business’s financial stability and potential.
Business Checking Account
Using a business checking account is a must. Maybe you’ve been able to operate just fine using your personal account for your business until now. But in order to convey that you’re serious about your business and its finances, you need to have a separate business bank account. (And nope, a personal account that you only use for business finances doesn’t count.)
Frequency of Deposits
The frequency of deposits made to your bank account can be a negative to potential lenders. They like to see consistent, predictable deposit activity.
Take a look at your bank history over the last six months. Do you only make deposits once a month when you get paid? This can be a problem for consultants or anyone who gets paid infrequently. To avoid this, try creating a payment plan for major client contracts. This will ensure that deposits come in more frequently.
Only deposits into your actual bank account apply toward the frequency of deposit activity, so make a habit out of regularly transferring in funds from your chosen payment processing system (i.e. PayPal).
Improving how lenders view your banking habits may be doing something as simple as making transfers of funds into your account from other sources in order to cover expenses. Lenders want to see an active business account.
Minimum Bank Balance
Another way to improve your likelihood of being approved is to maintain a consistent balance in your account as a cushion. Most experts say that an average daily balance of $2,500 over the last three to four months is a good start. Upping that cushion to $5,000 is even better. To the lender, this means you have financial resources over and above your stated cash flow.
Annual Revenue
If you’re planning ahead for future business financing needs, talk with your tax expert about amortization and depreciation write-offs. You may actually improve that magic cash flow number that lenders require by not writing off as much on your annual taxes.
Cash Flow
And speaking of cash flow, plan strategically and consider applying for your funding at the end of your peak season. Obviously, this is when your business’s financial status will look the most lucrative to lenders.
Along the same line of thought, you’ll want to carefully track your expenses as you prepare for the business loan underwriting process and put off any large expenditures that might substantially change your cash flow position.
Loan Underwriting Process: Some Final Thoughts
The business loan underwriting process can seem complicated, absolutely. There are so many decisions to make, and a ton of variables in play that just getting there is overwhelming.
That’s why there are networks of experts—find someone you trust and depend on them. Their expertise can be invaluable in not only giving you insights and speeding up the process, but also helping you see through to the other side!
In the online funding marketplace especially, lots of loan experts specialize in business needs. Lending specialists, whether online or in person, can make all the difference in getting you the cash your business needs with an affordable business loan.
Meredith Wood
Meredith Wood is the founding editor of the Fundera Ledger and a GM at NerdWallet.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.