For borrowers unfamiliar with how it works, the process of underwriting small business loans can be shrouded in mystery. After submitting the initial application, many small business owners are left in the dark when it comes to underwriting.
However, underwriting is one of the most important parts of your loan process. The underwriting process can essentially make or break your ability to secure financing.
In order to have the best shot at getting approved, you’ll have to know everything about underwriting—such as what lenders are looking for and which strategies can improve your application.
What Does Loan Underwriting Mean?
Underwriting is the process where lenders determine a borrower’s eligibility for funds by reviewing business documentation and credit information. Some lenders do this by hand, while others have automated underwriting processes to increase speed and efficiency.
At a minimum, they check the borrower’s revenue, credit profile, and time in business, but they can also inquire about outstanding liabilities, ownership percentages, and other business information. They do this to learn everything they can about the business. Specifically, how likely that business is to repay their borrowed funds.
This process can take anywhere from hours to months, depending on the lender. Banks and credit unions notoriously take the longest, whereas non-bank lenders are typically the fastest.
How Loan Underwriting Works
Just like a mortgage or personal loan, small business loans also go through a process called underwriting. Lenders use a mix of technology and human expertise after you apply for a loan to determine whether to approve your business for financing, for how much, and at what rates.
During the process of underwriting small business loans, lenders are trying to understand 3 things that will help them determine your eligibility.
First and foremost, lenders need to know whether your business will have the financial ability to pay back the loan plus the interest.
Lenders also need to know you’re willing to meet your financial obligations and make payments on time.
Finally, lenders want to know how your business will manage to stay afloat and make payments in case of an unforeseeable event—such as a fire, economic recession, or another revenue disruption.
These three factors help lenders to understand how your business will fare when it comes time to make payments. Depending on how you measure up, you may qualify for a number of options.
The Information About Your Small Business Underwriters Need
Lenders will look into your loan application and ask you to provide a number of documents to help them determine whether to approve your business loan. What you will be asked to submit and what the lenders will examine can vary according to the institution. However, most lenders will review the following.
| Information Type | Description |
| Income Statements | Lenders will use your income statements to verify your revenue and understand your ability to repay what you’ve borrowed when underwriting small business loans. Many lenders will also use your income statements to determine your loan amount based on cash flow. While funding amounts vary, most small businesses can get about 10% of their annual revenue at most. |
| Credit Reports | Lenders will check your credit report for any late payments and delinquencies to determine how willing you are to pay them back. Some businesses that have the financial means won’t always follow through with their payments. Your credit report, especially your personal credit score, will point out any potential risks. |
| Business Plan | How will you spend the money from your business loan? Do you expect revenue to increase in the coming months or years, and why? Have you worked out how your business will repay the loan in case of an unexpected event?
Lenders will have these questions in mind when reviewing your application and look to your business plan for answers. This is generally required at banks but not at non-bank lenders. |
| Collateral | One way lenders can ensure they are paid back is by enforcing a collateral requirement. They may ask you to put up your business assets or even personal assets.
It’s also not uncommon for banks, online lenders, and the Small Business Administration (SBA) to put a general lien on your property. However, there are plenty of unsecured loans and lines of credit that you can also qualify for in the market. |
| Debt-to-Equity Ratio | If your lender isn’t requiring collateral, they will most definitely be looking into your business’ debt-to-asset ratio. This is an important part of the small business loan underwriting process and will tell them whether your business has enough assets to cover your loan in case of default.
More often than not, lenders will want you to have more assets than debts, although some will approve you even with a 1:1 ratio. |
What Could Affect Your Deal’s Chances of Funding (And What Can’t)
Unfortunately, there are a few things that appear as red flags to lenders during the application process, which could inevitably affect your chances of funding.
Knowing the deal breakers is just as important as knowing what lenders look for. Watch out for the following:
- Recent merchant cash advances or other loans that were never disclosed on your bank statements
- Poor personal credit score
- A criminal background history
- Discovery of tax liens that were never disclosed
- Recent bankruptcy (within the last year)
- Discovery of unsatisfied judgments
- If you maintain less than 50% ownership
- A significant drop in revenue
- Discovery of an undisclosed, defaulted, or restructured business loan
Not all these factors will be red flags for every lender. For example, some lenders may be willing to approve you for a business loan even if you have poor credit or a recent drop in revenue. Online lenders, especially fintech lenders, are known for more flexible requirements.
Tips to Survive the Small Business Loan Underwriting Process
There are a few strategies you should implement a few months before and during the underwriting process to have the best chance for approval. These tips can help ensure your deal pushes through and you get the financing you need.
Deposit All Your Income Into Your Business Bank Account
If you’re not reporting it, then your revenue may not take you that far.
By depositing all your monies into your business bank account—including credit card sales and cash—you’ll signal to lenders that you have enough cash on hand to meet your payments.
Depositing all your monies will also help keep your business bank account in the positive. It’s crucial to keep your account from going into the negative during the underwriting process.
Aim for More Liquidity
When it comes to underwriting for small business loans, liquidity is king. You want to show lenders you have a hefty amount of visibly liquid assets, such as cash, stocks, accounts receivable, inventory, and more. This will show lenders you have the means to repay the loan, even in the case of unanticipated challenges.
Maintain Consistent Revenue Streams
While a sudden spike in revenue is always welcomed, lenders ultimately prefer to see a consistent flow of revenue.
Make Sure Everything is Accurate
Lenders are trained to track down all documents, spot inconsistencies, and ensure everything is accurate. Don’t think you can mislead them – the underwriter will find out!
Make sure to accurately report your debt, revenue, and all your bank accounts. Remember, if the underwriter discovers something you’ve tried to hide, it could hurt your chances for approval.
What Are the Key Factors Lenders Should Consider?
You’ve heard all the factors lenders could consider, but the main three are a business’s annual revenue, credit score, and age.
- Time in Business – Established businesses have more experience than startups and those in their infancy. This experience translates into a higher likelihood of repaying borrowed funds.
- Annual Revenue – A business that can’t generate enough revenue to cover its loan payments is doomed from the start. Expect a lender to inquire about your profitability before returning an approval.
- Credit Score – Although it’s not as important as it once was, credit scores are a snapshot of a business’s ability to responsibly manage credit accounts. Lenders view a spotty credit history as a red flag that the business is more likely to mismanage its loan balance.
Some lenders’ business loan underwriting guidelines prioritize one of these categories over the other. Still, it’s important to start your application with all of these factors in mind.
Small Business Loan Underwriting Process Steps
What can you expect the underwriting small business loans process to look like? Timeframes can vary according to different types of lenders. For example, online lenders are known to be faster than traditional banks.
Make sure to ask your lender about the expected timeframe. You’ll want to ensure you’re following the tips we’ve outlined above for the entire duration of the underwriting process to give yourself the best chance for approval.
Overall the underwriting small business loan process consists of 5 distinct steps:
- Application
- Review
- Approval
- Negotiation
- Funding
How to Survive the Underwriting Process And Get the Loan You Need
Know that different lenders are looking for different criteria. If you’re rejected for a business loan or want to consider a few of your options before agreeing to a deal, make sure to get in touch with National.
At National, we help small businesses secure the financing they need to get ahead. Whether you’re looking for a business loan or a line of credit, we provide you with the best options available in the market.
Fill out our 60-second application, and one of our expert Business Financing Advisors will reach out!
Disclaimer: The information and insights in this article are provided for informational purposes only, and do not constitute financial, legal, tax, business or personal advice from National Business Capital and the author. Do not rely on this information as advice and please consult with your financial advisor, accountant and/or attorney before making any decisions. If you rely solely on this information it is at your own risk. The information is true and accurate to the best of our knowledge, but there may be errors, omissions, or mistakes.
Joseph Camberato
Joe Camberato is the CEO and Founder of National Business Capital. Beginning in 2007 out of a spare bedroom, Joe and his team have financed $2+ billion through more than 27,000 transactions for businesses nationwide. He’s made it his calling to deliver the educational and financial resources businesses need to thrive.
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