A Step-By-Step Guide To Underwriting A Business Loan
Loans are available for a large number of business needs, from working capital term loans, short term working capital loans, business development loans, business investment loans as well as business loans for new business and business loan finance. As you prepare to apply for the relevant loan for your existing or new business, let’s discuss how commercial loan processing works.
When you apply for a business loan from a lender, the lender underwrites the loan or begins a process of analysis. This analysis applies to all the information you provide in your application as well as a search of your credit history to make sure you meet the loan criteria.
Here’s what it entails when it comes to small business loans:
Yes, your business needs to be profitable; however, it is important that your business cash flow reveal that there is excess cash in the system to be able to repay the principle along with the interest every month. After all, the underwriting process from the lender’s side needs to determine that the cash rotation shows surplus that can be used to repay the business finance loan.
This is an additional security that the underwriting process requires, which ensures that the business owner or the business has an additional form of security to repay the business loan. Collateral can range from the premises being used by the business, a house or any other building or commercial space owned by the business or the business owner. Further inventory, cash savings or deposits or even business receivables may be considered as collateral.
From the lender’s point of view, it is inevitable that you will treat the new debt much in the same way that you have treated credit in the past. Therefore, the process looks at how the business has treated past loans repayments. In case you are applying for a business loan for new business then the credit worthiness of the business owner is considered. A good history is reflected with a high credit score, which is maintained by various credit agencies.
You may be the owner of the business for which you seek a business loan, however, the underwriting process seeks to know how committed you are to your business. Have you invested in the business? Do you own a significant portion of your business? This goes to establish the belief the owner has in his business. After all, why will someone who does not have commitment strive to make the business excel?
Just like the borrower is keen to repay the loan and clear the debt in the quickest possible way without hurting the business, the credit institution needs to be absolutely sure that the money being advanced by it is going to be repaid at the predetermined dates. To ensure this, the personal guarantee of the business owner may be required as well.
Once you submit your application, the lender begins the underwriting process, which determines whether or not you are eligible for the business loan. For some lenders, this process is complicated and for others, it is relatively simple. Lenders like Bajaj Finserv do not require guarantors or collateral for loans and offer an easy online application for those looking for small business loans.