Once an application is submitted, depending on the type of credit, it will go through several stages of review.
A business credit application goes through various steps to evaluate and ensure a fair and thorough review. A single application can be seen by lenders, underwriters, and analysts — or it can go through a quick automated process, depending on the size and type of credit requested.
In all cases, it is vital to provide accurate and up-to-date information on the application. This will help it move through the process as quickly as possible.
As you await a reply, you may be interested to know what’s happening behind the scenes. These are some of the stages that your application may go through before you hear back from the lender.
1. Initial verification
The first group to handle the loan application will check the facts. This group will ensure that the information on the application is accurate and that the lender has all the necessary data to make a decision. Some of the things they will verify are:
- Income and expenses
- Time in business and/or age of business (if purchased form a previous owner)
- Personal and business credit reports
- Ownership records
If the business has accounts with the lender, that information will be analyzed as well. For example, lenders may review such things as checking and savings accounts, the date those accounts were opened, and the 12-month average balances, as well as credit card account balances and payments.
Once all the data from the application is verified, the lender will give the business a score to determine its creditworthiness. Some factors that come into play include cash flow, expenses, debt, the age of the business, and what collateral is available.
It’s important to keep in mind the numbers often vary from lender to lender. Some lenders use the FICO® Score model (for real estate loans, for example), while others use the FICO® Auto Score (for vehicle loans) or the FICO® Bankcard Score (for credit cards). They will also look at personal and business scores. And some lenders may use scoring models other than FICO®.1
Many lenders will use industry-specific scoring, too, because different types of businesses have different levels of risk. For example, healthcare practices generally have a steadier year-round cash flow than food service and seasonal businesses. That’s partly because outside forces like weather, the economy, and supply costs tend to have a bigger impact on the latter. However, the pandemic has impacted many businesses in different ways — including some healthcare practices, which saw drops in patient visits — so that may impact scores, too. Learn more at Understanding Credit Scores.
Scoring is more or less automatic — and may result in an automatic approval — but in some cases, the decision to approve a loan may shift to the underwriter. It is the underwriter’s job to take a much more detailed and nuanced view of the numbers and make the ultimate decision whether the level of risk to the lender is acceptable. The underwriter can decide whether a factor indicating higher risk (such as few years in business) is offset by other strengths (such as experience launching previous businesses or current market conditions and/or consumer demand).
Besides approving an application or not, underwriters have another option: recommending that the amount of credit be modified. Perhaps they will approve a smaller amount or they may believe that a factor such as the borrower’s income qualifies him or her for a higher credit limit.
4. Final data verification
This is a second, more in-depth check of all the given data. This round of review investigates any discrepancies in the data such as:
- Business names
- Personal and business addresses
- Social Security numbers
If they find any variances between the application and official records, they will need to verify the correct information, which can cause delays.
5. Finalizing and funding
Once everything is approved and verified, the applicant is notified of the decision, the loan account is opened, and the funds are made available to the business.
Be sure you clearly understand the terms of the loan and create a clear plan for staying on track with payments. The better you can demonstrate your creditworthiness, the easier it can be for you to be approved for credit in the future.
1 FICO is a registered trademark of Fair Isaac Corporation in the United States and other countries.