Understanding Loan Underwriting

commercial credit underwriting

Understanding Loan Underwriting

The whole process of underwriting business loans can seem a little surreal. For many it is one of the dark arts of lending, the unknown and the marginally uninteresting.

The problem most businesses have with trying to understand underwriting is they come at it from a biased angle, they are already emotionally involved and as such find it harder to look objectively at things. It is from here that the biggest misunderstandings begin.

To try and shed a little light on the dark art, here are a few common mistakes and how it could be done better to enable you to have a fairer understanding of credit underwriting.

Business Plan Positivity

If the owner of the business is not positive about things then there is something seriously wrong. However, here comes a great paradox and a level of hypocrisy so bear with me.

When providing a business plan to a lender be positive, but be balanced. A business plan with no identified areas of risk has little credibility, it is unrealistic and show the underwriter that you are living in a fantasy world, if the business plan fails to highlight areas of weakness then the numbers are likely to be equally fanciful.

When creating your business plan get someone else to read through it critically. Give it to someone who will not tell you what you want but be honest with you. If you can’t find that person then let me know as I can help.

The flip side to being realistic comes with the financial forecasts. I have seen business plans with 3 levels of numbers, the positive, negative and realistic. Not being funny, but if the realistic are realistic when what are the other two lines for? If you give a lender a negative they will take it as the most likely, they will then deduct sales, add costs and see where that leaves you.

So, for business plans, give one set of positively realistic numbers and a plan that shows some weaknesses.

No Skeletons In The Cupboard

Somewhere we all have some. The internet makes it pretty hard to hide from your skeletons so don’t try too hard. If you have CCJs or defaults then they will show up, if you have past failed companies then they will show up. It may mean the lender says no as a result of you mentioning them but they would only have said no later and wasted your’s and their time.

If there are skeletons then know what they are and use a lender that will work with them. Sadly Google makes it pretty hard to run these days. There are also so many free programs out there that you can very quickly verify whatever you are being told.

The other recommendation here is to get both your company and key people credit reports on the table before applying, sometimes there are skeletons at the back of the closet which you were never aware of.

Freak or Unique?

Another common line in business proposals is the ‘truly unique’. This is where a business positions itself or it’s proposition as something truly original. The problem here is that underwriters don’t understand unique. Underwriting is based on being able to understand what is happening (or going to happen) by applying the same situation to other similar company situations.

If an underwriter cannot compare then it creates doubt, which creates risk, which creates a problem for you.

I accept that some companies are unique. In that case draw parallels with things an underwriter will understand, compare yourself to what your substitute is doing now but make sure you justify why and how you will succeed, back up what you say by using clear and simple examples.

If you have any more detailed questions about how credit underwriting works then get in touch or add your comments above and I will get back to you.

By Dave Farmer

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