What happens when the time comes for your business to seek a loan? How does the loan underwriting process work and how do you give yourself or your business the best chance of being approved? Who is the underwriter and what role do they play in this process? What should you expect from your lender to mitigate potential underwriting mistakes and look out for your best interests?
After you supply your lender or broker with the requested financial information for your request, the underwriter takes over and has the job of evaluating every aspect of your loan request from the quality of the collateral, income stream and the quality of you, the borrower to determine if the loan meets the lenders risk guidelines. While the criteria may vary from lender to lender, and each commercial loan application is unique, there are some common criteria that all lenders look for while underwriting your application. Those criteria include the capacity of the income from the business to adequately service the debt; the value and quality of the collateral; the overall creditworthiness of the borrower; the level of equity invested in the business; secondary sources of repayment; any additional collateral or personal guarantors; and the story of your business to put the financial analysis into perspective.
While the underwriting process and amount of information sought from you, the borrower, may seem excessive and tedious, it is critical to cooperate and give the full picture to the underwriter to give yourself the best chance of getting your loan approved. On the flip side, the underwriter and the lending institution need to ensure they complete a thorough analysis while avoiding common underwriting mistakes that occur in the commercial lending industry. What might those mistakes be? Some of the most common mistakes that lenders can make in the underwriting process can include the following:
Communication issues – Far too often lenders fail to ask customers for enough details or don’t listen to specifics with regard to customer needs and place them in a loan type that just is not the right fit. It is also important that the lender manage the borrower’s expectations when it comes to potential rate, timing of the transaction and money needed to close the loan. Lenders should not hesitate to go back to the borrower with more questions, to validate the accuracy of data or get explanations for any inconsistencies.
Failing to get proper training for lenders – It is important for lenders to understand proper underwriting guidelines, recognize bankruptcy risk and other red flags, along with be able to structure a loan the right way to ensure not only that a loan request is processed efficiently, but also to avoid structures that are upside down, negatively affecting cash flow and repayment capacity.
Basic underwriting pitfalls – Strong underwriting involves understanding the risk components of credit, capacity, and collateral, otherwise known as the three C’s of underwriting. Basic controls need to be established by the lending institution to ensure a thorough review of the loan application and borrower documentation so all requirements and conditions are met; validating and revalidating data to avoid incorrect calculations, insufficient asset verification or occupancy misrepresentation; and proper oversight and checks and balances with the underwriting process and decisions.
In summary, as a borrower, you want to make sure your lender is looking out for your best interest and that you have provided all the relevant facts and documentation requested in a timely manner. It is crucial for them to be able to accurately and thoroughly underwrite your request, along with understand the purpose of the loan and the story of your business, so that they can effectively communicate your story and deliver the desired outcome.