What is Business Underwriting?

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.

Key factors for business underwriters

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:

  • Financial records and bank statements, including tax returns and credit histories
  • Sales, revenue, capital, and profit figures
  • Past and current expenses, business debt, and other risk factors
  • Other sources of repayment, including collateral
  • Business owners’ personal assets and credit ratings

Additional considerations for SMBs

When underwriting for Small and Medium-sized Businesses (SMBs), there are additional factors that may come into play:

  • Business Age: Newer SMBs may not have extensive financial records, requiring underwriters to look at other indicators of stability.
  • Local Market Conditions: SMBs are often more susceptible to local market fluctuations, which underwriters may need to consider.
  • Owner Experience: The experience and background of the business owner can be a significant factor for SMBs.
  • Online Reviews and Reputation: For SMBs, online reviews and social proof can serve as additional indicators of reliability and creditworthiness.

Current trends in underwriting

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:

Data and analytics

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:

  • Social media posts
  • Satellite mapping
  • Technographic data on a business's technology
  • And more

Underwriters can have a more complete picture of a small business applicant, and can conduct more accurate risk assessment and credit ratings.

Cyber risk

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.

New technologies

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.

Expanded underwriting expectations

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.