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A small business loan is one option to take into consideration if you need money for your firm. Between the time you apply for a loan and the time you receive the funds from the loan, there is a process called business loan underwriting. A business owner’s loan application isn’t always approved. Before making a funding choice, prospective lenders examine the applicant’s and the applicant’s financial information. Small business underwriting is this process.

Underwriting, in general, is a review procedure where information is confirmed and risk is assessed. An underwriter evaluates your health information when you apply for life insurance, for instance, to place you in a risk category. Instead of focusing on physical health when evaluating small company loans, potential lenders examine financial health. This phase is essential to help the lender decide whether to give money to a firm or not, and if so, what the loan’s terms and repayment amount will be.

Small company underwriting is a method of determining risk, just like life insurance underwriting. A lender may charge a higher interest rate on a loan if it determines after reviewing a business owner’s financials that the borrower poses a higher risk. It may completely reject the applicant’s loan request if it determines that the risk is too large.

An underwriter is assigned to your loan when you apply for a small business loan. This person has received specialized training in the underwriting of business loans. Generally speaking, the underwriter’s responsibility is to assess your loan eligibility based on the data you submitted in your application and the lender’s regulations. Underwriters go deeper into the specifics of your business and personal finances.

Here’s a closer look at what underwriters of business loans might take into account.

1. Collateral

Secured business loans require some type of collateral. For example, if you’re applying for an equipment loan, the equipment you’re purchasing might serve as collateral. In other cases, your company vehicle, for example, or your storefront, if you own it, might serve as collateral.

Read Also: How Can I Get Small Business Loan in India?

Loan underwriters will look at the value and quality of the collateral offered for a loan to make sure it meets the potential lender’s small business loan underwriting guidelines. Effectively, the underwriter is making sure that if you default on the loan, the lender has a reasonable chance of getting back some of what’s owed by repossessing and/or selling the collateral. 

2. Credit

Credit is central to qualifying for a small business loan. The minimum credit score required for a loan can depend on the type of loan and the lender. A potential lender may look at both personal and business credit scores or may focus only on business credit. In either case, the underwriter reviews your credit to make sure it aligns with what the lender is looking for. 

3. Business Income

Before a lender approves a business loan, it typically wants to know that the borrower has the capacity to pay it back. So another key factor in small business loan underwriting guidelines is income. If you’re applying for a loan for an established building, an underwriter may look exclusively at business income. If you’re trying to get a startup loan for a business that isn’t generating revenue yet, then your personal income can generally be substituted. 

4. Equity

Equity represents the value of the small business after liabilities are deducted from assets. This value is important as it’s used to calculate certain financial ratios for your business that can be used to measure its overall health. Loan underwriters can look at your balance sheet to weigh debts against assets. 

5. Other Considerations

Understanding how to underwrite a business loan can mean looking at other factors beyond assets, debts, or revenue. When underwriting business loans, lenders may also consider things such as:

  • How much the owner has personally invested in the business (i.e. how much skin he or she has in the game)
  • The business owner’s experience and track record in business
  • Whether a personal guarantee has been offered
  • Other sources of income that could be used to repay a loan

The goal of business loan underwriting is to create as complete a picture as possible of a business owner’s finances. The underwriter uses all the information you provide to the lender to do that.

Understanding how the business loan underwriting process operates will make it easier for you to navigate. Here are some pointers for making a successful small business loan application.

1. Know What You Need to Apply

Submitting an incomplete application for a business loan can lead to snags in underwriting to your application being denied outright. So before you begin, be sure you understand what the lender needs to start the underwriting process. That can include:

  • Basic personal information, such as your name, address, and Social Security number
  • Your business name or doing business as (DBA) name
  • Your Employer Identification Number (EIN) if you have one
  • A copy of your business plan
  • Information about collateral if you’re applying for a secured loan
  • Details about your business, including time in business, annual revenues, number of employees, et cetera
  • Financial records, including tax returns, bank statements, and/or pay stubs

You may spend less time filling out the loan application if you have all of this information ready in advance. It can also be helpful to review your cash flow, banking activities, and credit ratings to identify any potential difficulties that might arise during underwriting. For instance, if a late payment appears on your credit report, the lender might request a thorough justification from you.

2. Choose the Right Loan Amount

Consider how much money you need to borrow and how much a lender is likely to approve you for, based on your credit and financial details. If you haven’t worked out a detailed budget for what you need to borrow, it’s a good idea to do that before submitting a loan application. Apply for too little funding and you may need a second loan to fill the gap. Apply for too large a loan and you may end up having to repay more than you needed to begin with. And if the loan amount doesn’t match up with your ability to repay as determined by the underwriter, you could be denied altogether. 

3. Fill Out the Application Thoroughly and Accurately

Omitting information from your loan application or providing incorrect information could hold up the underwriting process, especially if you have to resubmit a new application. So before submitting your application to the lender, review it to make sure you haven’t missed anything. This is a relatively simple step, but it can make loan underwriting easier later on in the process. 

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