Business Loan Underwriting: All You Need to Know
When you apply for a small Business Loan, the process of underwriting determines whether you qualify for it or not. We take a look at some of the finer points that an underwriter considers to help guide a small business owner.
When you apply for a loan, the lender wants to make sure that you are able to repay it. The Business Loan underwriting guidelines and commercial loan underwriting guidelines help the lender evaluate and assess whether you and your business is a viable prospect for a Business Loan.
What is Business Loan Underwriting?
Business Loan underwriting is a process of verification of the prospective borrower to determine and analyse whether he or she is capable of repaying the loan. This is done by checking financial records, evaluating the collateral and understanding the business background of the borrower.
These pointers will help you apply for a small Business Loan and guide you on how to become a viable borrower:
- Strong Business Plan: Lenders require a detailed current and projected business plan, with enough income as well as money in savings to ensure that loan repayments will be made.
Cash-flow charts giving details of present and future income are mandatory, and they must show the extra inflow to cover repayments. As with any business, as a first step the entrepreneur needs to prove on paper that there is profitability in the business and that the cash flow in the business allows for the EMI payments to be made every month. This will ensure that you qualify for a small Business Loan.
- Collateral: The collateral is any form of additional security that the business offers to the lending agency that serves as a secondary security for the loan. This could be any commercial property that the business owns, its current premises from which it carries out its business, any bank security or even inventory can serve as collateral. The business owner’s assets can also be used as collateral. Ensure that the asset being offered as collateral is in the name of and is in possession of the business or the business owner seeking the loan. This step is considered important when you apply for a small Business Loan.
- Credit Score: Underwriters seek to know the past record of how the business dealt with debt. This gives the lending agency an insight of how the business will handle the new debt. In case of a new business, the underwriter may also look at the credit score of the business owner. Depending on the bank or financial institution, some will consider the loan application purely on the credit score while others may consider the credit score as one aspect of the application and give equal importance to the other aspects of the application as well.
- Equity: The underwriter also analyses the business owner’s equity in the business that has applied for a loan and his or her holding in the business. Ownership is a symbol of the belief that the business owner has in the business. The underwriter should get a sense that the business owner is dedicated to the business and this can be explained by the ownership title.
- Other Sources of Repayment: The application should also try and establish that the business is being steered by seasoned professionals who know how to raise capital from other sources, in case the need arises. Underwriters seek to know that the business is in good hands and they may require a personal guarantee from the business owner.
We understand that a small business has to strive to qualify for a small Business Loan so make things easier for yourself and choose a lender that offers convenient online application. Bajaj Finserv makes the small Business Loan process easier and uncluttered with a hassle-free application process complemented by easy documentation.