Business underwriting is the practice of assessing the risk and repayment potential of small business owners, typically when they apply for loans, insurance, or other financing. Underwriters use a similar set of criteria (credit history, income, credit score) to review these applications as they would for personal loans or personal insurance. These elements may include loan amounts, loan term, type of loans, interest rates, and more.
Underwriting is a prominent component of the loan application process, but it is also used to better understand and evaluate other financing decisions such as for issuing business credit cards or lines of credit.
Underwriting is a crucial part of effective risk management, especially in complex and ever-changing industries. As such, underwriters look to determine whether a business borrower is in good financial standing, creditworthy, and capable of paying back any financing that is provided — on time and without missed payments.
To properly evaluate business applicants, underwriters might examine a variety of business and financial records for approval, such as:
When underwriting for Small and Medium-sized Businesses (SMBs), there are additional factors that may come into play:
Core underwriting principles may remain the same, but new trends in the business and work landscape are changing the way underwriting functions and the number and type of services it provides:
In an increasingly digital world, underwriters have access to more types of information which makes the underwriting process more holistic. Comprehensive and up-to-the-minute financial and industry reports are now joined by:
Underwriters can have a more complete picture of a small business applicant, and can conduct more accurate risk assessment and credit ratings.
The more companies rely on technology to run their business and connect their employees online, the more vulnerable they are to hacking, phishing, viruses, and ransomware attacks. Cybersecurity isn’t just an ever-present concern for those companies—it’s also a major consideration for lenders. They will have to evaluate a company’s risk for cybersecurity breaches, and factor that into the overall risk of every business applicant, even if their core business has nothing to do with cybersecurity.
Technological advances are continuing to change the way that underwriters work. Tools like automation and AI offer new ways to track, curate, and measure the core data that underwriters need. They also can simplify some underwriter responsibilities or take them over entirely. AI, for example, can provide instant quotes or customer support, while machine learning algorithms can help with reviewing applicant data, leading to faster decisions.
With these new tools handling basic data review and analysis, underwriters are being asked to move to more collaborative, customer-facing roles. This change in expectations signals a shift in what an underwriter’s basic responsibilities are, but instead of a threat, it can be an opportunity for them to learn, explore, and assume more relationship- and business-building responsibilities, with more dynamic and emotional skill sets required.