Science or Art? Why Underwriting Fails
Scienctist; a person who is trained in a science and whose job involves doing scientific research or solving scientific problems. Artist; a
Generally speaking the characteristics of these two people are at opposite ends of the spectrum, it is like putting an accountant and a designer in a room and expecting each to be able to do the job of the other, it is not going to happen.
The reason why many companies fail to get their commercial finance approved is down to the same thing. The underwriting of credit on the high street has changed, it is no longer an art, it is now a science.
The Underwriting Complaint
The most common complaint businesses that fail to get finance is that things were better in the old days, when the lender made decisions directly and you could speak to someone who had the authority to sanction your business loan.
The entrepreneur can be classified as an artist. The creative skills, determination and ability to compartmentalise issues, work around them and create a solution to someone else’s problem.
Back in the ‘good old days’ you had one artist talking to another. Back then underwriting was an art. It was about identifying the risks using business models, looking for mitigating factors and trying to structure something that worked for both the lender and the borrower.
These days underwriting is much less an art than a science. Statistically driven, factually based and a decision made without emotion. Right or wrong, the way bank underwriting has changed with the scientist winning over the artist.
Entrepreneurs Are Artists
This is the core of the breakdown in things. Credit underwriting has changed but the applicant remains the same. You no longer have likeminded professionals talking the same language but two very different personality types trying to reach a mutually agreeable outcome.
For large companies this was never a problem, the finance director skills and ability to produce statistics and financial reports was always achievable in-house. Where it fails is with the small business who don’t have the in-house skills.
Put simply, talk the same language. If you are applying to your bank then bear in mind that the person you are speaking to is not the decision maker so;
- Don’t apply or ask for finance at your first meeting, use this for information gathering
- Ask exactly what is required in terms of information, records, forecasts etc
- Ask how this information is wanted and in what format
- Ask directly whether the minimum you want is within the lender’s criteria
- Insist on a timescale and insist this is kept to. Say when you will provide information and ask when you will get a response
Too often businesses jump straight in, don’t. Like all scientists it is about a formula, it is about the right elements and following the right procedure.
For any guidance before applying for finance then please get in touch or add your comments above.
By Dave Farmer