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Updated: November 25th, 2019
Applying for a business loan is just one part of the funding process. Before you receive financing, a lender has to approve your application.
To minimize their financial risk, most lenders look for applicants with good credit and a history of paying off debts. Lenders want to know you’re capable of making regular repayments, and that you have the means to pay back your loan if your business defaults.
To figure this out, lenders use a process called underwriting to review loan applications and determine a business’s creditworthiness.
Why is this important to know as an applicant?
Understanding underwriting can help you better prepare to apply for funding. Learning about what a particular lender looks at to assess eligibility can help you determine 1) whether or not you’re exploring the right loan option for your business and 2) if you are, what you need to do to qualify for funding.
Every lender has a different approach to underwriting, and some processes may benefit you more than others. For example, some lenders do everything manually, while others rely solely on technology to deliver answers.
And some lenders are more tight-lipped about their underwriting methods, while others share information with their applicants about what to expect. If you understand the basics of your lender’s underwriting process, you can figure out what to highlight in your application as well as which changes to make to your business — if any — before you apply for funding.
In short, understanding a lender’s internal approval process gives you better insight into what it takes to qualify for a loan. At Funding Circle, we try to be as transparent as possible about our underwriting process, so you always know what to expect before, during, and after applying for funding.
What do underwriters do?
Underwriters assess the overall creditworthiness of an applicant. While consumer credit underwriting is relatively straightforward, small business creditworthiness is more complicated. Though the steps look different for every lender, the goal is the same: to determine whether or not an applicant is eligible for funding, and on what terms.
To help with the process, many underwriters now use advanced underwriting software to scan applications for specific qualifications and requirements. At Funding Circle, we combine technology with the knowledge and skill of experienced underwriters for a fast and fair approval process.
What do underwriters evaluate?
There are three primary objectives for the underwriting process: 1) to evaluate the applicant’s overall credit profile, 2) identify potential risk areas, and 3) ensure the business has enough cash flow to repay the loan.
Underwriters do this by analyzing the supporting documents a business includes with its application, evaluating things like cash flow, the strength of the balance sheet, and the personal credit profile of the loan’s guarantors. Depending on the loan you’re applying for — whether it’s a term loan or line of credit, for example — underwriters may scrutinize certain documents more than others.
Here are the most common things underwriters review:
Reviewing these different documents provides better insight into a business’s health and growth potential. For example, looking at a business’s revenue over several months gives you a good idea of their sales history, consistency, and projected growth. Reviewing cash flow, on the other hand, shows you how much debt a business is taking on, and tells you how well the company is managing its accounts receivable and payable.
However, as valuable as it is to review an applicant’s financials in detail, it’s also crucial to look at the big picture. When reviewing an application, we ask ourselves, among other things:
How is Funding Circle different from traditional lenders?
Traditional lenders, like banks and the Small Business Administration (SBA), have a more rigorous underwriting process than alternative lenders. Not only do banks and the SBA require significantly more paperwork than alternative lenders, but they also have higher standards for assessing creditworthiness. What’s more, many traditional lenders still do many processes manually and haven’t yet adopted the advanced technology that would facilitate and speed up the underwriting process.
As a result, traditional lenders have lower approval rates. According to a 2018 survey from Biz2Credit, alternative lenders approve loans at nearly double the rate of traditional lending institutions, which tend to accept just one in four applicants.
With alternative lenders, however, the application and underwriting processes are much more streamlined. At Funding Circle, you have to submit a handful of personal and financial documents when applying. Still, unlike a traditional lender, we’re not hung up on any one of those individual documents.
As underwriters, we believe credit history is an essential gauge of a business’s financial and operational stability, but so are other, less quantifiable factors, like online customer reviews or a business owner’s passion for the market opportunity. We’re committed to helping small business owners succeed, which means we look at the big picture instead of just the numbers. Our philosophy is that if you build a credit “box” that’s too rigid or narrow to fit into, you miss out on good borrowers.
4 benefits of Funding Circle underwriting
At Funding Circle, our underwriters are a team of highly trained credit professionals who bring years of industry experience in small business loan underwriting. We use advanced underwriting technology so we can spend less time crunching numbers and more time reviewing your plans for your business. This amazing technology, in turn, speeds up the approval process and allows you to get your funding faster.
2. We assign one underwriter per application
We assign just one underwriter per loan application, so your application won’t be passed around a corporate committee. Having just one person evaluating your business ensures we’re 100% focused on your application, so you don’t have to worry about a piece of important information slipping between the cracks.
3. We take a human approach to underwriting
When we look at an application, we don’t just use a formula to get the answers we need — we tap into our wealth of experience to carefully review your business’ cash flow, stability, and longevity. Our underwriters, many of whom have a family history of business ownership, are passionate about seeing small businesses succeed. Our mission is to understand the nuances of each business we lend to, so we can determine the best way to help business owners achieve their goals.
4. The application process is easy and free
Our application and underwriting process costs nothing. Unlike applying for traditional business loans, applying at Funding Circle takes just 10 minutes. Plus, you can get a response in as little as 24 hours. If you’re curious about what you might qualify for, apply today with no obligation.
At Funding Circle, our goal is to optimize the underwriting process so you can get approved for loans faster, and with better rates. If you have any questions, feel free to reach out to one of our support members at any time.
Chris Capecelatro is Funding Circle's U.S. director of underwriting. Previously, he managed credit risk for a global casualty insurer in addition to working in commercial lending for a local bank.