The underwriting process for a business loan can be done in as quickly as 24 hours1 and follows a five-step process where:
- The borrower submits an application online, or at a banking center if it is with a traditional bank, with the documents required.
- A loan specialist reviews the documents for accuracy and authenticates them to ensure the business loan applicant is who they say they are.
- The underwriter begins a full analysis of the application including the business’s finances and their risk of defaulting on the business loan.
- The applicant gets approved or declined.
- If approved, you’ll be provided with a loan agreement that you can accept, reject, or negotiate depending on your risk level with the lender.
- If declined, you can ask why and either reapply, look for alternative forms of financing, apply for a smaller amount, or try another lender.
- The applicant accepts the terms, signs the loan agreement, and the funds are deposited into their account.
Underwriting can be nerve-wracking, especially with a traditional bank as they likely have a lengthy process and a ton of red tape. If you choose this route, you may have to wait a longer time for approval compared to with an alternative lender. You may also be stuck with a longer payback period. This means the debt will stay on your business credit report for longer.
Going with alternative lenders means you can get faster approvals and talk to loan specialists that may be more personable. Oftentimes, alternative lenders are not mega-corporations, so you can expect personalized attention vs. feeling like you’re a number. The interest rates may be higher than with large banks, but the payback periods are typically shorter. This means the debt clears from the reports of business credit bureaus faster. Also, specific terms may be up for negotiation.
Regardless of whether you’re going with large banks or alternative lenders, the process is the same. Here’s more information on each of the five steps so you know what to expect and can make sure you’ve provided all the necessary information.
Before we jump in, note that each lender and borrower will have a different situation and potentially slightly different requirements. The timeframes provided in this guide are a base line for alternative lenders and some of the quicker large banks.
Submit Your Business Loan Application
Time to complete: 1 to 15 minutes depending on the lender.
Go to the lender’s website and fill out the online application form or set up an appointment with your local bank if you want a traditional business loan. Make sure to fill out all application fields as accurately as possible and to check your email’s spam folder if you don’t get a direct confirmation after submitting the forms.
When filling out the forms, use a phone number and email address that you check regularly. Lenders look for responsible business owners, and part of this is being responsive and answering their questions.
Pro-tip: Whitelist the domain of the lender to help make sure their emails get to your inbox. Also, call them to ask what phone number the loan specialists may call from if they have questions, so you know when to pick up.
Application Review
Time to complete: 1 hour to a few days, depending on the complexity of the application and materials needed.
Once your application is submitted for the type of business loan you want, the review process will begin. This is when the loan specialist will reach out.
If you applied for inventory financing because you are looking to restock inventory and hire new staff as a busy season is about to begin, a working capital loan may actually be better. The loan specialist will know the types of financing that match your needs, and they can set you up with a solution that has the right amount, payback period, and flexibility as it pertains to usage of funds.
They’ll also be able to match the use of the funds with the collateral you submit, helping to ease the burden. If you are applying for a general small business loan, but equipment is where the majority will be spent, an equipment financing loan may be better and you’ll likely be able to use the equipment you’re purchasing as part of the collateral. This can help reduce the burden on your company. The next step is for the application to go to the underwriter for a risk analysis.
Analysis of Risk
Time to complete: 24 to 72 hours for complete applications for non-complex loans.
This is when the underwriter, the person who either approves or rejects your application, reviews your “creditworthiness” and determines whether they believe your business will be able to make loan payments. Applicants do not normally get access to the underwriter; they communicate through the loan specialist.
The underwriter will go through the application and evaluate all documents and materials submitted as well as financials, like the company’s:
- Debt to Income Ratio: The total monthly debts compared to the total monthly income, where a lower ratio is preferred.
- Loan to value ratio: A measurement of how much of the asset you’re purchasing will be paid for by the loan, and its potential value in the aftermarket arena if the borrower defaults. This ratio is used mostly in real estate purchases but can apply to machinery and other assets. A lower number is less risky for the lender and works in the borrower’s favor.
- Collateral: The assets that the company allows the lender to seize and sell in order to recover the amount of the loan in the event the company fails to make payments.
- Time in business: A metric used to show stability and the company’s ability to survive over time.
- Steady cash flow: Lets the underwriter see how much money the company typically has available, showing their ability to make payments including during slow seasons.
- Business bank accounts and statements: Allow the underwriter to see how much cash on hand the business has available over an extended period of time to see if they are likely able to make payments.
- Business credit score: Helps the underwriter to see how many recorded debts are owed. This displays the company’s financial responsibility with making payments over time and is a number assigned by the three business credit bureaus (Dun & Bradstreet, Experian Business, and Equifax Business).
- A business plan: Provides insights into your strategy (i.e., how you’re planning to use the funds) and displays your knowledge of your industry and acumen as a business owner.
- Your character as a business owner: Is one of the 6 C’s of Credit and is used to determine how well you have managed credit and finances over the course of managing and owning your business.
Your loan specialist will know what the underwriter will be looking for and will help you organize the materials you submit. This can positively affect your chances of approval. During the review step, the underwriter may ask for more information. This is not a good or a bad sign necessarily and may simply be standard practice.
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Approval or Decline
Time to complete: Typically instant, right after the underwriting process is complete.
The underwriter makes a decision and either approves or declines your business loan application.
What Happens If You Get Declined
If you get declined, you will be able to find out the reason and can start working on fixing any issues for future applications. In a situation where you cannot get an approval because the reason is out of your control, the loan specialist may offer a different type of business loan for consideration.
If they do not have one, you can always apply with a different lender, or look for other types of business financing like invoice factoring, equity investors, and financing through personal assets.
What Happens When You Get Approved
When you get approved for the business loan, you will get the loan agreement outlining the payback period, interest rate, penalties, and other loan terms. This is your chance to accept them as is, negotiate terms you do not like if you are an “in-demand”/highly creditworthy borrower, or decline to sign and move on if there is no way to come to an agreement.
And that brings you to the last step: signing and getting the funding.
Signing and Disbursement of Funds
Time to complete: 24 hours to 3 business days
The last step is to sign the agreement. Once you sign, both you and the lender will get a copy to save, and the lender will release the funds to your account. If you get approved for a business loan with us, you can have funds in your account as soon as the next business day. Each lender will be different, so make sure to ask before you apply if your situation is time sensitive.
When you know what to expect, the underwriting process can be pretty quick and simple. If you have questions about your options with us, you can click here to fill out our quick loan application form. You’ll be able to talk to a Funding Specialist and explore customized options for your business without having to make any commitments.
National Funding does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors.
