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How Does a Lender Approve Loans? Franc Jo February 17, 2014 Often when we apply for business loans we wonder why lenders ask a myriad of questions, some annoying, and why they take too long to form opinions. To understand the process of approving business loans, you need to examine the key factors thereof. ( -- February 17, 2014) Acworth, Georgia -When you apply for a business loan, your loan officer will forward your application and the supporting documentation to a loan underwriter. The loan underwriter’s responsibility is to review and analyze your loan request and the supporting documentation to ensure that the request meets the lending institution’s lending criteria and to determine whether or not you qualify for the loan. The loan underwriter prepares an internal document called "credit memorandum". A package containing a credit memorandum, underwriter's analysis and recommendations is forwarded to a loan committee or an approving authority for discussion and determination. The loan underwriter examines your application to see if it meets these basic criteria: 1. Your ability or capacity to repay the loan. A lender will want to know exactly how you will repay the loan. Is your income enough to cover the new loan and the existing loan payments after your other monthly expenses? To figure this out, lenders will consider cash flow from the business (Earnings Before Interest, Tax, Depreciation and Amortization [EBITDA]), Debt Service Coverage Ratio (DSCR), the timing of the repayment, and the probability of successful repayment of the loan. To calculate DSCR, determine EBITDA and divide EBITDA by annual debt service of all debts (add up all recurring annual debt payments plus the proposed loan payment). Most lenders look for a minimum Debt Service Coverage Ratio of 1.20 times. That is, EBITDA should cover loan payments 120% or more. If your DSCR is less than 120%, the loan amount may be reduced or the entire loan denied depending on the type of the loan being considered. If you have other sources of income, ensure to tell your lender in order to boost your Debt Service Coverage Ratio. Your lender will obtain a credit report so that they may assess your payment history, which is a critical part of the loan approval process. 1. Capital Your lender will want to know how much of your personal money in cash and/ or assets you have invested in your business. The investment is known as capital. Your lender expects you to also participate in risk-taking should the business fail. The loan underwriter confirms your seriousness in having the business succeed if you have a ‘skin’ in the game. Underwriters use a ratio known as Debt/Equity to determine the level of owner’s money invested in the business as compared to bank debt. Sometimes underwriters may use total liabilities, that is, all bank debt plus supplier credit to refine this ratio further. Two parts of debt to one part of equity is considered satisfactory.

Underwriters may stretch that to three parts to one, depending on the type of the industry and the borrower’s ability to generate cash flow. 1. Collateral The loan underwriter analyses the sources of loan payment. The primary source is cash flow from the business or real estate being financed. The analysis follows the procedure discussed in paragraph number (1) above. The secondary source of repayment is the sale of the asset(s) pledged as collateral. The loan underwriter analyses collateral in terms of quality, salability and adequacy. 1. Condition The loan underwriter will look at other general factors before forming an opinion. These include the intended purpose of the loan, type of the loan being sought and the institution’s policy. The lender will also consider local economic conditions, the country’s overall economic climate, the lenders appetite for lending to your line of business and industry. For example the loan underwriter will have to determine if your type of industry is thriving, static or declining. 1. Character The general impression you make on your lender will play an important role in determining the fate of your loan application. Based on your credit history, resume and/ or background information that you provide, the loan underwriter will form an opinion as to whether or not you are trustworthy and have the will to repay the loan or have what it takes to successfully steer your company during good and bad times. Your business experience and skills including those of your key personnel will be reviewed as well. In summary, the loan underwriter will consider all of the foregoing factors collectively so as to form a subjective opinion on whether or not you qualify for a loan. Before applying for a business loan, take time to gather the necessary documentation and analyze it. If overwhelmed, seek help from a professional loan packaging company.

Resource Franc Jo is the senior loan underwriter with Loans Underwriting, LLC, the premier provider of outsourced loan underwriting support to lenders and loan solutions to small businesses throughout USA. Solutions include credit analysis, loan packaging, loan reviews, credit policies, business plans, account receivable management, and business health diagnosis. The author can be reached at and you can read similar articles on money matters at

Loans Underwriting LLC 3330 Cobb Parkway Ste 324-178 Acworth, Georgia 30101 1-800-858-8593


How Does a Lender Approve Loans?  

Often when we apply for business loans we wonder why lenders ask a myriad of questions, some annoying, and why they take too long to form op...