A loan underwriter determines the level of risk a bank would take on if you are approved for a loan. Obviously, financial institutions prefer to reduce their risk as much as possible and that’s where the underwriter comes in. His or her analysis goes well beyond simply reviewing your credit history. An underwriter looks at many aspects of your finances and business activities to determine whether your loan application package is both true and tells the whole story.
Experienced underwriters really have seen and heard it all, so forget about submitting phony financial projections, bank statements or insubstantial business plans. You’re far better off applying for funding programs whose requirements you can meet than trying to fool an underwriter. But sometimes you may legitimately qualify for funding yet be turned down because you missed filling a report or didn’t know exactly what an underwriter looks for. Read on and learn how to avoid making the little mistakes that can make an underwriter decide that you’re a big risk
Make Sure Your Reporting is in Order
If your U.S. business is a limited liability company, corporation or a nonprofit corporation, you are legally required to submit a Periodic Report each year to the Secretary of State. This is an informational report that ensures, among other issues, that basic information about the company is kept current and available to the public. Submitting this report helps keeps your business in “Good Standing” with the Secretary of State. If you are late filing the report, your company will be in “Delinquent” status until a Statement Curing Delinquency is filed.
Pro tip 1: Funders look into a business’ filing status because business owners often start skipping on reporting to the state when they're going to dissolve a company. So, in the eyes of an underwriter, not having your company in good standing indicates that the company could be going under or switching entity types.
Pro tip 2: If your business is a sole proprietorship, you should have a business bank account - and possibly a “Doing Business As” (DBA) registration - that is in good standing. A DBA (fictitious name) registration enables a business to operate under a name different than the owner’s name. It’s easy for a busy sole proprietor to miss renewing his or her DBA, so check your state’s licensing database to make sure your DBA hasn’t expired.
Bank Account Statements and Revenue Trends
Most funders will look into your business’ revenue trends and may request bank statements going back further than just the last 3- 6 months that you might be assuming are all you’ll need to provide. If you need to get this documentation from your bank it may take a little while, so make your request early.
Pro Tip 3: For seasonal business owners, having two years of bank statements that shows the fluctuation in your business will give you an upper hand. The underwriter will be able to see how you manage the highs and lows of your business cycle.
Pro Tip 4: People are used to using touch ID or stored passwords to log into their bank account. Make sure to have the log in credentials to all your accounts ready. Not being able to remember how to access your accounts can really slow down the approval process.
Have Sufficient Proof of Ownership
The more documentation you can supply, the easier it will be to verify the validity of the business and your ownership of it. Some of the documents you may need to provide include: IRS docs/EIN Letter, Annual Report, K1, Schedule C, Tax Returns and all other available entity documents.
Pro Tip 5: If your loan will be secured by collateral, you will also need to supply proof of ownership for the property, buildings or goods that you are using as collateral.
Non-Sufficient Funds, Fees, and Overdraft Protection
Overdrafts on your business bank account will hurt your overall qualification with any funder, it is a sign of poor money-management in a business. Having between one to three overdrafts per month puts a flag on your file and an underwriter must re-analyze all documentation. If you have more than four overdrafts it becomes very difficult to underwrite and at five or more overdrafts per month it becomes extremely risky for any funder to consider the application. An underwriter is likely to see multiple overdrafts as an indication that the company is strapped for cash and looking for funding from anywhere to try to get through to the next month. And for small business, overdraft fees – which average $27- $35 per check paid by the bank - may make it impossible to climb out of a financial hole.
Pro Tip 6: If you do sometimes find yourself having to juggle funds, your bank’s overdraft protection program can be a great help (FlexiCuenta for those in Puerto Rico). With overdraft protection, typically your business checking account is linked to another account such as your business savings account or business credit line. If you have insufficient funds in your checking account, the money in the linked account is automatically transferred and used to pay any checks you have written.
Make Sure to Be Current on Rent
This is applicable to any rental business or any business with a physical location. Underwriters will check to make sure you can meet your basic obligations. Being late on rent indicates a business that is looking for funding not to grow the business but simply to avoid eviction or keep the business alive just a little bit longer.
Pro tip 7: Get current on all bills before seeking business funding. Even if you are somehow approved for a loan when you owe rent, you run the risk of taking on too much debt. Sometimes funding can save a business that is essentially healthy but has hit a rough spot, but there are also issues that cannot be fixed by additional financial investments. Be realistic about your business’s financial health.
Your references could be community leaders, other business owners, your friends or family members. No personal information regarding your business or the financing you are seeking will be disclosed, so don’t hesitate to ask people who know you and are happy to speak well of you if they’d be willing to give you a reference.
Pro tip 8: When you don’t have the documentation and clean credit history required to get approved for a traditional loan, consider taking advantage of options with less-stringent requirements. One of the easiest ways to find an alternative lender is to get pre-approved by One Park Financial, which then gives you access to a funding expert who can discuss your business needs and options to determine what funding types best meet your needs.