The Underwriting Process of Small Business Loans

When it is time for you to apply for a business loan for your small business, you need to understand what underwriting is so you can improve your chances of approval. Although it may seem overwhelming at first, here we will help you understand how the process works for lenders underwriting small business loans.

What Is the Loan Underwriting Process?

Underwriting is the process a lender uses to decide whether they should loan you money and under what conditions. The most important factor that lenders look for are people who can pay them back.

They review all the required documentation that you provided from your personal to business financial history. Both your personal and business credit scores determine the level of risk. If you are high risk, the lender will charge higher interest rates in the case that you do not pay back the loan they do not suffer a huge loss.

The three main things lenders want to accomplish during small business underwriting is

  • Determine how risky you are
  • Minimize the loss if something goes wrong with your loan
  • Minimize the underwriting process cost

Underwriting Guidelines for Small Business Loans

Typically, lenders require the following when underwriting an application:

  • Regular income adequate to service the debt obligation
  • Value and quality for the collateral
  • Credit history of the borrower
  • Equity of the borrower

How the Business Loan Underwriting Process Works

Step 1: Applying for a Small Business Loan

The first step is you start filling out an application for a business loan. You can do this in person or filling out an application online. Online applications are generally simpler than filling out the application in person.

Step 2: Gathering Documentation

Businesses are asked to provide financial history and business performance information during the application process. Be sure to have all business documentation assembled in advance. Different lenders have different requirements but here are some of the common requests:

  • Business financial statements: profit-and-loss statement, balance sheets, etc.
  • Business plan: a plan that shows how you will use the funds and achieve your goals.
  • Personal financial information: this will be reviewed and your creditworthiness will play a role in the decision of the lender.
  • Tax returns: lenders will want to see at least 3 years of business and personal tax returns.
  • Business license: lenders may want to verify that the business is licensed.
  • Outstanding debt obligations: lenders will want to see if you have any outstanding loans or commitments when reviewing your application.

Step 3: Loan Underwriting Review

The lender begins the loan underwriting review once the application has been filled out and completed. If you applied at a bank, the lender would look at your financial history to make sure that you are not high risk. If you applied through an online lender, you can be approved instantly if they have an automated process.

Step 4: Approval

After the online lender approves your loan, you can see your funds as soon as the same day depending on the lender.

If you used a traditional bank, the lender would write a report saying why you are approved or not for the loan.

Documents Needed for Different Business Loans

There are several different business loans to choose from and the documents required will vary on the type of lender. Here is a checklist of some of the common required documents.

Long-term loans

  • Balance sheet
  • Profit and loss statements
  • Business plan
  • Tax returns
  • Business debt schedule

Short-term loans

  • Business plan
  • Balance sheet
  • Tax returns
  • Cash flow projections
  • Active accounts
  • Proof of licenses

Merchant cash advances

  • Tax identification number
  • A few months’ worth of credit card processing data and bank statements

Business lines of credit

  • Business license
  • Tax returns
  • 2-3 months of bank statements
  • Business bank account number
  • Cash flow statements
  • Profit and loss statements
  • Accounts receivable and accounts payable
  • Personal tax and bank account information

Invoice financing

  • Proof of ownership (business license, tax identification number, etc.)
  • Accounts receivable and accounts payable
  • Tax returns
  • Sample invoices
  • Credit report

Equipment financing

  • Proof of ownership (business license, tax identification number, etc.)
  • Profit and loss statements
  • Tax returns
  • Personal resume
  • Business plan
  • Credit report

SBA loans

  • This loan is popular, and the application process can be lengthy. Each type of SBA loan has its own set of requirements


As you can see there are a ton of variables that play in the part of the underwriting process and it can be overwhelming. Communicate with your lender whether in person or online to give you their insights and help you get your chances of being approved increased.