April 5, 2022

How the business loan underwriting process works


For the average consumer, underwriting is a term associated with insurance. But business owners need a more expansive definition of the concept. Underwriting is the process of mitigating risk for a fee. That isn’t limited to the insurance industry. Underwriters also have a role in approving a business loan. Understanding how that works is the key to getting approved. 

Obtaining working capital for a business is not an easy undertaking. Larger firms with more established revenue streams have more options. Small companies and startups need to rely on underwriters to determine their credit worthiness and assess the risk to lenders. Unsecured loans aren’t approved without due diligence. Underwriting is part of that process. 

What is underwriting?

Underwriting is risk assessment. It’s utilized by lenders, insurance companies, and to determine the value of securities. It’s called “underwriting” because the original process involved having the risk taker write their name under the amount of risk that they were willing to take in exchange for a fee. It’s more complex than that now, but the concept is still the same. 

Someone needs to assume the risk in case of a default. That’s how lenders stay in business. The term “unsecured” means that the borrower doesn’t need to post security to obtain a loan. That doesn’t mean that the lender isn’t mitigating their risk. There’s always an underwriter backing up that loan, and they determine whether the business is eligible for it. 

The same thinking is applied with insurance. Policy rates and payout amounts are determined by the underwriter’s review. The calculations aren’t performed by the insurance salesperson. The rates that the business owner is given for insurance premiums are set after several variables are combined into a complex algorithm by the underwriter. 

Apply a similar thought process to the price of securities. Determining what a share will be worth prior to an IPO is not a simple matter of adding up the assets and liabilities of the company. There are other factors to consider, like growth and industry. Underwriters use those factors to help set the price before the IPO is launched. In short, they add credibility to the offering. 

Underwriters have incredible power over the financial resources of businesses. Certain industries, like e-commerce, don’t easily meet the underwriting criteria, making it difficult to get working capital to expand operations. Other industries have companies with physical assets, something the underwriter can put a value on. We’ll get into that in more detail below.   

The 12 steps in the underwriting process

Let’s examine this from the perspective of a business owner seeking to raise working capital through debt. The underwriting process begins with a loan application, but there are several steps for the business owner to take before getting to that point. Being a prepared borrower helps facilitate the underwriting process, increasing the chances of loan approval. 

1. Create or update your business plan

Business loan applicants won’t get past the gatekeeper if they don’t have a legitimate business plan. This doesn’t just apply to new businesses. Established companies should update their plan and document how they manage cash flow. Rest assured that lenders will ask these questions. 

2. Prepare financial statements for your business

This should be done regularly each fiscal quarter, so you can just bring your latest financial statements to the lender. These break down the company assets and liabilities, expenses, shareholder equity, and other useful pieces of information that the underwriter will need. 

3. Calculate how much you need

The loan amount requested should be realistic. Don’t attempt to borrow more than existing revenue can sustain. Underwriters will deem that too high a risk and your loan application risks being denied. 

4. Have a detailed plan for the funds

The lender will ask what the purpose for the loan is. The more detailed your plan is for those funds, the better your chances of approval. Remember, these are still pre-steps to the application and underwriting process. Proper preparation produces positive results. Be thorough in the planning stage.  

5. Submit your application

This doesn’t require much explanation, but we do need to emphasize accuracy on the application. Double check everything before hitting “submit” or handing over a hard copy. Mistakes can be costly at this stage. 

6. Loan officer will screen the application

Loan reps handle hundreds of applications per year and don’t want to waste the underwriter’s time. Before turning your application over, they’ll review it and pre-screen you for creditworthiness. A personal credit check may be required, and you should expect a review of your business finances. 

7. Loan officer sends application to underwriter

The underwriting process takes time, especially if you’re asking for large amounts of money. Once the lender sends your application over, it becomes a waiting game. 

8. Underwriter double-checks application

Imagine the underwriter doing the same thing the loan officer just did, double-checking your application. It’s part of their job and necessary for them to get all the information they need for underwriting analysis. 

9. Underwriter checks personal and business creditworthiness

This is a deeper dive than the loan officer will do because the underwriter will ultimately determine whether you get the loan or not. Expect to see some activity on your credit report. 

10. Underwriter appraises the company

This is where underwriting and simple credit checks differ. To obtain an unsecured business loan, the value of the business must be determined. You don’t have to put up security, but they need to know you can afford to repay the money even if revenue numbers decline.   

11. Underwriter sets a risk value for your company

This is where the underwriter says, “we agree to take on “X” amount of risk in exchange for “this” fee. They’re essentially agreeing to back the loan at this point, so this is your real approval step.   

12. Lender approves or denies loan based on underwriter report

Loan officers approve or deny based on the recommendations of their underwriters. Borrowers who did a proper due diligence in the beginning should have a good chance at this stage.

Underwriting processes for insurance and securities are different, but the concept is the same. This is how businesses get approved for funding or gain credibility in an IPO. In the next section, we’ll talk about the different types of underwriting and how they work. 

3 types of underwriting

There are three types of underwriting business owners should be aware of. They are loan underwriting, insurance underwriting, and securities underwriting. The last applies to public companies or companies preparing for an IPO, but it’s not a bad idea to familiarize yourself with the concept. The knowledge may come in handy in the future.  

Loan underwriting

All loans require some type of underwriting. That’s how lenders assess risk. Underwriters review the applicant’s credit history, financial records, the value of any security or collateral, the business size, and revenue stream. Unlike some personal loans where the underwriting process is automated, business loans are normally reviewed by a human underwriter.

Mortgages are another type of loan that requires human underwriting, and they’re not exclusive to individuals. Businesses buy property, so they may be exposed to the mortgage underwriting process. Refinancing also requires underwriting.    

Insurance underwriting

Insurance underwriting uses different variables when calculating the risk of the insured. Insurance companies aren’t looking for a “payback.” They’re trying to avoid a “payout.” With medical insurance, they evaluate the health risks and age of the individual, using that information to set the health insurance premium or even deny insurance in some cases. 

Business insurance is based on risk also. The factors that go into business insurance underwriting include the age of the business, history of insurance claims on behalf of the business, and value of any physical property being insured. 

Securities underwriting

Securities underwriting is initiated by investment banks and special purpose acquisition companies (SPACs) prior to taking a company public via IPO or direct listing. The goal of this type of underwriting is to determine the asking price for securities. In other words, how much are your company shares worth? The number needs to be right for market success.

Securities underwriting is very different from other types of underwriting we’ve listed here because the risk assessment is being done for the investor. It’s not contracted on behalf of the company, so as a business owner you have very little control.   

Does getting a loan for my business require underwriting?

All lending requires an underwriter, even a business credit card, which is a loan in another form. The good news is that prospective borrowers are not required to find their own underwriters. It’s built into the lending system. Keep that in mind when you apply for a business loan. The loan officer is just the face of the lender. The underwriter is the power behind the curtain.     

5 tips for ensuring a smooth underwriting process

A smooth underwriting process increases your chances of being approved for a loan or line of credit for your business. That working capital could be a catalyst for growth, a stabilizing force, or a means to launch a new product line. Know what you want it for before applying, then make sure you do the following before the application gets sent to the underwriter. 

Increase your personal credit score

Yes, it’s a business loan. But that doesn’t mean your personal credit score won’t be a factor. Pay off personal debt, eliminate any collection accounts, and don’t take out any other loans while waiting for underwriter approval. 

Prepare quarterly financial reports

Avoid going to the bank if you don’t have these. Online lenders will also ask for them. It will be very difficult to find a bank that will lend money to a business that can’t produce accurate financial reporting. 

Use a CPA for tax filings

A professional tax return goes a long way with the underwriters. It tells them you’re responsible enough to have a CPA handle your business with the IRS and that you have a handle on what tax liability is. 

Maintain liquidity

Businesses with poor liquidity ratios are running too close to the line. Companies should be liquid enough to pay all outstanding bills in the event of an emergency, like a global pandemic for instance. 

Ask for reasonable amounts

Be realistic. Underwriters are more likely to approve a reasonable request than an unreasonable one you need to justify.

Access higher limits with Ramp's commerce sales-based underwriting

High-growth businesses need access to credit faster in order to sustain their roadmaps. But far too often, accessing this working capital can be difficult through traditional underwriting processes.

Now, with our new commerce sales-based underwriting process, businesses can access limits up to 30x higher than traditional corporate cards thanks to streaming sales data from platforms such as Shopify, Stripe, and Amazon Business. Learn more about commerce sales-based underwriting today.

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Are business loans screened by underwriters?

Yes, all loans are screened by underwriters. Lenders rely on them to assess risk and determine whether applicants are creditworthy enough for loan approval. 

Can I hire an independent underwriter?

Lenders and insurance companies employ their own underwriters, so you have no choice in who reviews your loan or insurance request. Investment banks and SPACs hire independent underwriters to help set the price for IPOs and direct listings on the stock exchange. 

How long does the underwriting process take?

It depends on the lender and whether the underwriting is done by a human or fully automated. Most business loans are reviewed by human underwriters and the process takes one to two weeks, though it may be faster with some institutions. 

Can an underwriter deny me for a business loan?

It’s the underwriter, not the loan officer, who makes the decision on whether you’re worthy of a loan. Follow the preparatory steps in this article to increase your chances with them. 

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