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What’s the Small Business Loan Underwriting Process?

Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

If you’re new to applying for a small business loan, you’re not alone if just about everything seems overwhelming—the types of business loans, your potential, and understanding the loan terms that come with them. Then there’s the small business loan underwriting process, which involves a lot of paperwork and complicated steps.

But it’s very much worth understanding what’s involved in small business loan underwriting, since this is the actual process of getting approval for a small business loan. And when you have a window into the business 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 small business finance, having realistic expectations of how things will proceed is essential for making sound decisions about the future of your business. Knowing about the small business loan underwriting process is the first step.

Every Borrower Goes Through Small Business 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 is in your future, you’d like to know what to expect.

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 finally you make the best choice for your small business borrowing needs. This is when the small business loan underwriting process begins.

The Small Business Loan Timeline: From Inquiry to Funds in Hand

The specific timing of all the individual components that comprise the small business loan process from start to finish can vary widely. 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 lender. How quickly you can gather your documentation generally plays a big role in how fast the small 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.

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Step 1: Screening for Small Business Loan Qualification

The borrower’s journey through the small business loan underwriting process generally starts with a phone call with a loan representative.

Depending on the lender, loan broker, or small business lending marketplace (like Fundera, for instance), 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 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 small 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 small 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 small business loan options fit into your upcoming business plans before you’re ready to move on into the application phase.

Step 2: Completing the Loan Application and Providing Documentation

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 small business loan underwriting process smooth as butter. (Or at least smoother.)  

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 small business underwriting process, depending on the type of product they are prepared to offer.

Here’s a look at, generally, each will need to underwrite your small business loan:

Typical Documentation Requirements for Online Lenders to Underwrite Your Loan

There are many fantastic things about working with alternative lenders—aka lenders beyond your local bank. Among them is that small business owners have a lot of flexibility with the range of documentation—plus how much—that they’ll be required to provide to secure some kind of financing.

Also great: There are many pros available to help you through the tricky small business loan application and subsequent underwriting process to speed it along.

For these loan products, surprisingly, you won’t need much to go full speed ahead into the small business loan underwriting process once you’re approved:

Typical Documentation to Underwrite Business Lines of Credit

  • 4 months of business bank statements

Typical Documentation to Underwrite Invoice Financing

  • 4 months of business bank statements
  • Equipment quote

Typical Documentation to Underwrite Equipment Financing

  • 4 months of business bank statements
  • Invoice(s)

Typical Documentation to Underwrite Merchant Cash Advance

  • 4 months of business bank statements

If you’re looking for a term loan, you’ll need to show a bit more documentation before you can get your small business loan underwritten:

Typical Documentation to Underwrite Small Business Multi-Year Term Loans

  • Past 1 or 2 years personal and business income tax returns
  • 3-6 months of business bank statements (or sometimes more, especially 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.

Additional Document Requests for Bank or SBA Loans for Applications and Underwriting

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:

  • Property, business, sales, municipal, and potentially other tax statements
  • Business overview and history
  • All relevant business licenses, permits, and approvals
  • Payroll records (previous 6 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 strict, and 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 small 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.

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Step 3: Responding to Follow-Up Questions and Document 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.

Although this may sound sort of cheesy, stay positive—if they want more information, they’re still interested in your candidacy as a borrower.

Step 4: Receiving Business Loan Offers and Going Through Final Loan Underwriting

Again, depending 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 small business loan underwriting process.

How Lenders Make Small Business Loan Underwriting Decisions

The Old 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 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 small 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 4 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 Small 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 small 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.

small-business-loan-underwriting

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 small business loan underwriting process and put off any large expenditures that might substantially change your cash flow position.

***

The small 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 small 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 small business loan.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Meredith Wood

Meredith Wood

Editor-in-Chief at Fundera
Meredith is Editor-in-Chief at Fundera. Specializing in financial advice for small business owners, Meredith is a current and past contributor to Yahoo!, Amex OPEN Forum, Fox Business, SCORE, AllBusiness and more.
Meredith Wood

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