Business Loans

"What do Underwriters and Banks actually Look at?"

September 28, 2020


Content Contributor for The Company Doctors | Financial Advisor | Former Banking President

Underwritng - What does it really mean!

Underwriting simply means a lender verifies your income, assets, debt & property details in order to issue final approval for your loan.

An underwriter is a financial expert who looks at your finances & assesses how much risk a lender will take on if they give you a loan.  

Four Key Loans where Businesses deal with Underwriters

            Lines of Credit

                    Typically for one year,renewable annually.


                     Some are formula based (i.e.) xx% of Receivables + x% of approved inventory (called a borrowing base) - self certification


                   Some requirethat the loan be Cleaned up to a zero Balance at least 30 days during the year.

                    Subject to the wims and policy changes of the banks.

                    Lines of credit should be for ongoing shortfalls of working capital; always fund short term needs

                    If you're losing money, banks won't fund your Losses, except for very exceptional reasons.

            Term Loans

                    Should fund long-term needs, i.e., equipment, capital improvements, permanent working capital needs & other long term needs.


                    Long term loans can run from 2 years to as long as 30 years for real estate; usually floating tied to Prime.


                    Governance is by loan agreement – will have loan covenants that must be met to prevent default – working capital,

                                debt coverage, leverage, financial statement requirements.


                    Balance sheet should reflect current portion of term loans (principal due one year) as well as long term portion of

                                long term loans – amount due to term.    

            Asset based loans

                    Lines of credit secured primarily by a percentage of eligible accounts receivables.


                    Eligible typically is any account that is outstanding for 90-days or less; some lenders may allow up to 120-days (exception).


                    Commercial bank do A/R financing (see short term loans above) & there are commercial finance companies that do A/R financing.


                    Finance companies often require that you send copies of all invoices and bills of lading showing product

                                has been shipped and the A/R has been created.


                    More expensive than commercial banks, with fees for document review and handling, but more flexible.


                    Finance (and some commercial banks) will conduct an annual audit of your books and accounts receivables.


                    Very few finance companies and commercial banks will lend against inventory; if so, typically against materials easily sold.


                    Factoring involves selling your accounts receivables to a factoring company; very expensive, heavy on fees, and

                                typically a hold back against payments from your customers.    

            SBA Loans     

                    Section 504 loans are for real estate purchases and refinancing.


                    504 loans are typically 50% from a commercial bank, 40% from a CDC(Community Development Corp – nonprofit),

                                and 10% equity from the borrower.


                  Section 504 loans may have a fixed interest rate on the commercial lender’s portion (fixed for 3-5 years typically), and

                                fixed on the CDC portion.


                  Term can be up to 20-years.


                  Maximum amount is $14-million.


                  Section 7a loans are used for equipment and working capital, with maturities of up to 7-10 years.


                    Section 7a loans are also used for real estate acquisitions, at variable rates, up to 25 years, with at least 10% down (equity). 


                    Maximum amount for 7a loans is $5-million.


                   Documentation is long and arduous; if the lender is a certified SBA lender, they can approve and fund the loans

                                without SBA approval, and the turn-around is fairly short; if not, and the SBA needs to review and approve, it can take

                                up to two or three months. 

            Financial Projections are Key for Underwriters 

                    Why – demonstrate your ability to repay debt.


                    What – conservative, realistic, supported by historical performance.


                    How – know your business, weaknesses & strengths.


                    Pitfalls of doing a financial projections aggressive sales, unrealistic changes in COGS, inconsistent SG&A, Bal sheet

                        does not balance, NW does not reconcile.


                    The good news about financial projections – congratulations, you have a budget!

General Expectations of the Bank and Underwriter!

Personal guarantee of any 20% or more owner

3-years of company tax returns

If not filed in recent tax year, then internally prepared detailed financial statements

3-years of personal tax returns

Personal financial statement

1-year of company bank statements    

Key items to focus on when preparing

            Universal Cash Flow & What Is It & How Is It Calculated?    

                         The Sum of Business cash Flow (EBITDA) = Net income + Interest expense + Taxes + Depreciation + Amortization

        Calculating your Discretionary Personal Income

                        Personal income after income taxesLesshome mortgage or rent, installment

                                 loan payments, credit card payments, other Plus: spouse’s income,

                                outside income, investment income 

                                            Example how to calculate>

              Combined Cash Flow Calculation &

              Debt Coverage Ratio


                                            Example how to calculate>


            Collateral – A Way to Reduce a Lender’s Risk

                      All the assets of the company and the cash proceeds

                                therefrom (sometimes called a “plaster lien”

                        Accounts Receivable – advances made against a % of the

                                 outstanding A/R’s less allowances for bad debt

                        Equipment; always when financing new equipment

                        Real estate – commercial, investment and residential


            Personal Guarantees

                      Lender may not require spousal guarantee,

                      However, If spouse is a 20% or more owner of                                 the business, personal guarantee is required

                      If spouse’s portion of discretionary income is substantial, lender

                                may require a personal guarantee; should discuss with your


                      Guarantees today allow a lender to pursue both company assets &

                             personal assets of guarantor(s) simultaneously, not sequentially


           Security Agreement and UCC-1 Filings

                      Document that defines the collateral that you agree to provide the lender

                        By making a UCC-1 Filing the lender records their rights as a holder of collateral with the State;

                                referred to as perfecting their collateral

                        Oftentimes borrowers discover that UCC-1 lien filings have not been removed when past loans are paid off;

                                need to do a UCC-1 search

            Personal Credit - FICA Scores

                      Yes, even with great collateral, a high DCR, credit scores count 

                        Lenders consider credit scores as a character indicator

                        Commercial bank score requirements are higher than most non-bank lenders

                        Before applying for a loan, pull your credit score and check for accuracy

                        Credit Karma is a good website to use

            Prepare your Financial Statements

                      Have 3-yrs of tax returns 

                        You should have the most recent balance sheet and income statement ready

                        Lenders want to see A/C Pay and Rec aging reports

                        Internally prepared or prepared by your accountant


           Your Balance Sheet

                    Does it balance? Assets = Liabilities + Equity

                       Does Equity & Earnings reconcile?Current equity = Prev. yrs equity + current income

                      Do A/R & A/P aging balances agree with balance sheet entries?

         Balance Sheet Ratios

                        Working Capital = Current Assets – Current Liabilities        

                        Quick Ratio = Cash + A/R – Current Liabilities

                        A/R;A/P/Inv Days On Hand = How fast does it turn

             Income Statement

            (a.k.a. P&L Statement – Profit Statement – etc.)

                      Are income and costs consistent year to year?

                       How do you calculate material costs? (Beg Inv + Purchases – Ending Inv)

                         Is your Cost of Goods consistent year to year?

                        Are all direct costs included in COGS?

                         Are you making an Operating Profit?    

                         OP = COGS – SG&A expenses (and before interest expense)    

                        Are your SG&A expenses consistent.......Be prepared to explain spikes


           Cash Flow Statement

                      What and how is it created?

                        Scary? Look at your bank statement!

                        Keep in mind Financial statements use an accrual methodology

                        Cash flow statements are based on cash, in bank, in your drawer



                      Underwriters and prepared financials play a crucial role across many financial situations. The process of underwriting also has several complexities, all of which are based on how well the specifics of your finances line up with the company’s respective policies. Don’t be afraid to ask questions!

The more you understand about the entire process and the more prepared you are the better off you’ll be.  

        We are here to help!

Schedule a complimentary  virtual review below and get prepared to close your loan!