You’ve probably heard the old saying that the only way a bank will lend money is if you can prove you don’t really need it. The business loan underwriting process can seem frustrating, but there’s good reason behind it and ways you can help it move more quickly.
Commercial loan applications are typically lengthy. If you’ve ever pursued a loan for your company, you know some of the questions being asked and information that’s requested may seem a bit intrusive. Given that you’ve provided so much information, you may wonder why it takes as long as it does to review it or why your bank may need additional answers.
In simple terms, underwriting is how a bank confirms the accuracy of the information you’ve submitted and evaluates whether you and your company are likely to pay us back. Loans represent an investment for banks, and we all know every investment carries a certain amount of risk. Before you make an investment for something like your retirement fund, you need to make sure you’re comfortable with the risk. That’s exactly what underwriters do with business loans. FUN FACT: The term itself is ancient, dating back to the days when lenders would handwrite their names at the bottom of loan agreements to verify their willingness to provide funds.
The bank assigns your loan to an underwriter, who is responsible for reviewing and analyzing your application and the supporting documentation. Contrary to popular belief, the underwriter’s primary responsibility is not to look for reasons to reject the application, nor do underwriters typically have the power to make those decisions. Instead, the underwriter will use all the information and extensive analysis to present a summary that gives the bank’s loan committee or relationship manager the confidence to make the lending decision.
Underwriters usually begin their task by making sure your application is complete and that you’ve submitted all the requested documentation. They review everything to verify that you didn’t make any mistakes with the application. You might be surprised how often a company makes simple mistakes such as transposing a couple digits of their employer ID number.
As the underwriters analyze the information, questions may arise. For example, they might not understand how you arrived at the valuation for a particular asset, or why a line on your P&L statement seems unusually large or small. They or the relationship manager will reach out to you for clarification, which might involve a request for additional documentation. Those requests don’t imply a lack of trust in you or what you’ve said. They’re just part of performing the necessary due diligence and documenting the support for the decision
The underwriter uses a variety of standard analyses to verify your company’s creditworthiness and ensure your company’s cash flow will be sufficient to pay back the loan without adversely affecting your day-to-day operations. They’ll generate a variety of ratios to better compare your company’s situation to industry norms and other borrowers. They’ll examine trends in your business and look for any signs of potential trouble.
It does take time to thoroughly underwrite a loan. How much time depends largely on the completeness of your information and the speed with which you respond to requests for additional data or documentation. Some borrowers resent being asked for more detail, but the bank doesn’t make those requests to irritate applicants or delay the process.
So how can you speed up the underwriting process? Two things are most helpful. The first is organization. Fully completing the application and providing all the requested information upfront makes it easier for the bank to complete the review. It’s baffling how many applications are submitted with gaps in basic information.
The second is a cooperative attitude. When you get a call or an email from the underwriter, responding quickly and collaboratively helps speed things along. When you think about it, the underwriter serves as your advocate, justifying your need for the loan and attesting that you’ll pay what you owe. When you make the underwriter’s job easier, you’re the ultimate beneficiary.
Some other steps you can take to speed and simplify the process include giving the lender permission to communicate directly with your CPA, so the underwriter can obtain updated tax documents and financial statements and answers to questions directly without having to work through you. If your loan will be backed by a personal guarantee, the bank will also need personal financial data. Like most banks, ours provides a form that incorporates the specific information we’ll need. Completing that form accurately can save significant time.
I can’t understate the value of taking a cooperative attitude with the process. Assuming your loan is approved, you and the bank are going to have a working relationship and a stake in your success for several years. Starting that relationship on the right foot benefits both of us.
Karen Gregerson is President & CEO of The Farmers Bank, a locally owned and operating bank with 11 banking offices in Central Indiana.