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The Small Business Loan Underwriting Process – Everything You Need To Know
Did you know there are over 100 steps involved in the process of getting a small business loan? The underwriting process is different for each lender, and it can take as little as 2 weeks or up to 3 months. In this article, I will break down for you everything you need to know about the underwriting process so that you have an idea of what to expect from your lender!
What is the Small Business Loan Underwriting Process?
The small business loan underwriting process can seem daunting, but it doesn’t have to be. Here’s everything you need to know about the process and how to make it work for you. The first step in the small business loan underwriting process is to get pre-qualified for the variety of financing options that are available to you. Most businesses tend to skip this step, and they jump right into the loan application process without fully understanding the specific requirements from each lender. This is why over 90% of business loan applicants get denied for their loans without fully understanding the reasons behind the rejected application. The team at MyBusinessCredit.com can help you avoid this problem by working with you to review all lender requirements BEFORE you ever submit your first application.
The next step in the business loan underwriting process is to gather the necessary financial documentation. This includes tax returns, financial statements, and bank statements. Once you have all of your documentation in order, you’ll need to fill out a loan application. After you’ve submitted your loan application, the lender will review your information and make a decision on whether or not to approve your loan. If your loan is approved, the next step is the underwriting process. By working with MyBusinessCredit.com, you can significantly increase your chances of an approval by getting pre-qualified from the start.
Next is the underwriting process. The business loan underwriting process is when the lender reviews your financial information in detail to determine whether or not you’re a good candidate for a small business loan. The lender will look at factors such as your credit history, current income, and assets. They’ll also consider your business’s financial history and projections. Everything that the business loan underwriter does is meant to help answer one simple question: “Is your business likely to default on the loan?” Once the underwriting process is complete, the lender will give you a decision on whether or not they’re able to approve your loan. If everything looks good, you’ll get the green light and be on your way to securing funding for your small business.
The Importance of Credit Rating
Credit rating is one of the most important aspects of the small business loan underwriting process. Lenders will use your credit score to determine your risk level and whether or not you are a good candidate for a loan. The higher your credit score, the lower your interest rate will be.
If you have a low credit score, you may still be able to get a loan but it will likely have a higher interest rate. Ideal business loan candidates have a credit score of 680 or higher. If your credit score is lower, it is recommended that you work to raise it BEFORE you apply for a loan.
Breaking Down Income Statements
An income statement is one of the most important pieces of information a small business owner can provide when applying for a loan. This document tells lenders how much money a company is bringing in and where that money is being spent. When reviewing an income statement, lenders will be looking for several key pieces of information:
Revenue:
This is the total amount of money coming into the business. It’s important to break down revenue by source, such as product sales, services, and other forms of income.
Expenses:
This is the total amount of money being spent by the business. Expenses should be broken down into categories such as cost of goods sold, overhead, marketing, and salaries.
Net Income:
This is the difference between revenue and expenses. It’s important to have a positive net income, which means that more money is coming in than going out. Lenders will use this information to assess a company’s financial health and determine whether or not they are a good candidate for a loan.
The Importance of Cash Flow Statements
While the underwriting process for small business loans can vary by lender, there are some key elements that all lenders will look at when considering a loan. One of these key elements is the cash flow statement. The cash flow statement is a document that shows how much cash is coming in and going out of a business.
It is an important tool for lenders to assess whether or not a business will be able to repay a loan. There are a few things that lenders will look at when reviewing a cash flow statement. First, they will want to see if the business has enough cash coming in to cover the loan payments. Second, they will want to see if the cash flow is consistent or if there are large swings in income and expenses. Lastly, they will want to make sure that the business has enough cash on hand to cover any unexpected expenses.
If you are applying for a small business loan, be sure to have your cash flow statement ready for the lender. This document can be the difference between getting approved for a loan and being denied.
Understanding Profit and Loss Statements
For small business owners, one of the key components to securing a loan is providing a profit and loss statement (P&L). This document is a snapshot of your business’s income and expenses over a specific period of time, typically covering the most recent 12 months. While the P&L may seem like one more piece of paperwork in an already long list of loan requirements, it’s actually a very important part of the business loan underwriting process. Lenders use the P&L to get an idea of your business’s financial health and to gauge its ability to repay a loan.
So what exactly should you include in a P&L? Here’s a quick rundown:
Revenue:
This is the total amount of money your business has brought in over the specified period of time. Be sure to include all sources of revenue, such as sales, service contracts, investment income, etc.
Expenses:
These are the costs associated with running your business, including things like employee salaries, rent, utilities, supplies, marketing costs, etc.
Profits or Losses:
This is the bottom line figure that tells you how much money your business made or lost over the specified period.
Why Small Businesses are Still Losing Out Despite A Great Economy
Despite a strong economy, small businesses are still struggling to get approved for loans. In fact, loan approval rates for small businesses are stuck at about 10%. So why are small businesses still losing out? There are a few reasons. One is that many small business owners don’t have the time or resources to put together a strong loan application. They may not have experience with financial statements or know how to present their business in the best light.
Another reason is that the underwriting process has become more stringent in recent years. Lenders are looking for more than just a solid business plan; they want to see proof that the business can repay the loan. This can be a challenge for small businesses, which often have limited operating history and collateral.
Fortunately, there are some things small businesses can do to improve their chances of getting approved for a loan. First, it’s important to put together a complete and accurate loan application. Make sure all financial information is included and that you’ve described your business in a positive light. Second, take the time to develop a strong relationship with your lender. Get to know the lender’s underwriting criteria and what they’re looking for in a successful loan applicant.
Remember, this entire process is intended to reduce risks for the lender by helping them avoid applicants who might later default on their loans.
Conclusion
The small business loan underwriting process can be daunting, but it doesn’t have to be. By following these simple tips and understanding the process, you can increase your chances of being approved for a loan. So don’t be afraid to ask questions and get started on your road to success.
And as always, if you need assistance with understanding your financing options, feel free to contact the team at MyBusinessCredit.com, and work with a knowledgable professional who is ready to help!
