How Does Underwriting Work?

When the time comes for your business to apply for a loan, you’ll want to read our guide to the application process so you can be prepared and give yourself the best chance for approval. This article will help you understand how underwriting works and what they look for when making the decision to approve or deny you for a loan.


We’re going to take you behind the desk for a look at how the decision is made, examining the process of underwriting, or how a lender actually figures out whether or not you’re eligible for the product you’ve applied for, whether it’s a mortgage, a home equity line of credit or a commercial loan.


What Does an Underwriter Look At?

The exact criteria may vary somewhat from lender to lender, but the Small Business Administration (SBA) has a standard many adhere to. The SBA says:


Prudently underwritten small business loans should reflect all relevant credit factors, including:


  • Capacity of the income from the business to adequately service the debt.
  • Value and quality of the collateral.
  • Overall creditworthiness of the borrower.
  • Level of equity invested in the business.
  • Any secondary sources of repayment.
  • Any additional collateral or credit enhancements (such as guarantees or key-person insurance).


Let’s explore what each of those means and what an underwriter would be looking for.


Income to Adequately Service the Debt

In a nutshell, this basically means your business has to be making enough money to pay back the loan with interest. How does an underwriter know this? By analyzing your financial statements. For most small businesses, cash flow will be key. How much are you currently taking in each month and how much is going out? Will you have enough left over to pay off a loan without crippling your business? What are your projections for the future?


Expect to provide information about your revenues, operating expenses and net income as well as your current assets and liabilities. An underwriter will be looking to make sure that the numbers make sense for the amount you are asking to borrow.


There is a very important human element, as well. Veronique Marcus is an underwriter with Accion, and she says the story of your business is equally important. For her, understanding the type of business you’re in fleshes out the picture and puts the numbers in perspective.


Marcus says your circumstances will be different whether you own a hair salon or a deli, or if you have a taxi service or provide accounting services. As she puts it, “The business story gives the underwriter a sense of the economics so he or she can better assess what the costs are with each particular business.” Site visits are also very important, Marcus says, and help add even more to the story. Her best advice: The more open the client is, the better.



The Small Business Association (SBA) defines collateral as “an additional form of security which can be used to assure a lender that you have a second source of loan repayment.” In other words, property or something else of value that you will give up if you default. It’s basically a safety net for the lender that gives them something to fall back on if you can’t pay back the loan. Nobody wants that to happen, but an underwriter will have to determine how much your collateral is worth.


The most common form of collateral is property, such as a home, but it can also include inventory, cash savings or deposits, and equipment. Always keep in mind that using your own personal assets as collateral means you’re willing to risk losing them if you default. Of course, with smaller loans, such as those typically made by a microlender like Accion, less collateral would be required.


If you’re concerned about a lack of collateral, discuss that with the lender. Even with all the documentation required, whether to approve a loan or not is still a determination made by a person. Accion’s Marcus points out that, “In the end, the purpose of our underwriting process is aimed at building trust between two partners (Accion and the client). The more we understand, the better we can help!”



No doubt about it, this one’s important. How you’ve treated debt in the past is one of the best predictors for how you’ll handle it in the future, so underwriters will certainly look into this.


If your business is young or a startup, your personal credit history will be even more important. Marcus says having a history of borrowing money is helpful, as she can then look to see if you repaid that debt in a timely manner. And yes, she cautions, “Delinquencies are an issue. The underwriter will want explanations for why they occurred, and may request proof.”


It’s always a good idea to know what your credit picture looks like before approaching a lender. By law, you’re entitled to receive a free copy of your credit report from each of the three big credit bureaus once per year. To do so, you can visit the central credit report website they set up for this purpose or call toll-free 1-877-322-8228.


Some lenders will only consider lending you money if you meet their minimum credit score, but others will consider it within the context of the rest of your application. Sometimes, an underwriter can find other strengths in your business or finances to make the loan possible even if your credit score isn’t ideal.



Your own investment in the business is another signal to an underwriter that you are committed to its success. Sometimes, equity is referred to as “capital” on a loan application. Capital can be in the form of how much of your own money you put into the business initially, how much of the company’s earnings you’ve held onto, or other personal assets you’ve invested back into the firm. An underwriter will usually look more favorably on a small business when the owner has made a personal investment.


Secondary Sources of Repayment and Additional Collateral

In their underwriting guidelines, the Federal Reserve Board and Federal Deposit Insurance Corporation recommend lenders analyze other sources of repayment and collateral, as well as the business owner’s ability to come up with additional capital if necessary.


This means you will likely have to sign a personal guarantee that says you’ll be responsible to repay the loan if the business cannot. You may also be asked to have a co-signer for the loan, someone other than you who is not involved in the business and has a steady source of income.


Other Factors

Every lender will have its own lending criteria, and will weigh each item differently. As a rule, the less documentation you need to provide, the higher the interest rate will be. If you satisfy most of the items listed above, your chances for approval are good.


There are organizations that will make loans to those with damaged credit or with little-to-no documentation, but Marcus points out that may cost you dearly. She says, “Interest rates in those situations can be as high as 45% to 1000%, which ultimately may destroy a client’s business.” There is no downside to applying to a reputable lender to first see where you stand.


How to Help the Underwriter Help You

Read up on the documentation you need to have and get it ready in advance. Be prepared to show your strengths as a borrower, and offer explanations for any weaknesses you might have. For Marcus, consistency is a big theme. As she puts it, “The story has to make sense and the documents provided need to back it up.”


Having a solid business plan is the best way to tell your story and will go a long way toward answering many of the questions an underwriter might have. The better you can do that, the better your chances are for approval.


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