In the past few weeks, the planet has been ravaged by a pandemic that has spread globally. Majority of U.S. businesses have shut down, and it seems like recently the question that has been on the mind of governments and citizen is how to re-open safely without harming or affecting others. Here we are going to discuss what effects the shutdown recession is affecting best practices of underwriting for U.S. business loans. If you have any aspirations of taking advantage of other people's capital, it is important for you to understand how this affects what kind of loan you are going to get.
In order to understand how funding is going to be affected, first we must find out what underwriters are looking for in the first place. Out of all of the major factors when determining eligibility and terms for a business loan, time and again we see the same guidelines when approving business loans. Below we have listed the top 5 factors when underwriting a business loan:
Industry - While here at FunderHunt we can lend to any business industry and type, there are higher risk levels depending on the business type. For example, the majority of transportation companies and any auto sales, are considered restricted industries. For this reason alone, it is hard to fund a lot of businesses if they are not stellar in each of the other categories.
In addition, due to the lockdown, we have seen as many as 40% of businesses shut down. What this means is that if a business is closed, cannot operate and cannot bring in new revenue, there is technically no way for a lender to get paid back. As a result, these 40% of businesses are eliminated and cannot access capital.
Deposits/Revenue - Lenders typically like looking at a business' receivables, and the way that lenders that fund future receivables typically determine eligibility is by looking at business' recent deposits into their checking account. During a recession, consumers typically spend less money which leads to less receivables for a business. Lenders like seeing large amounts of revenue, coupled with little debt service to other lenders. If people are spending less money, due to shutdowns, where no one is allowed to live their house, most businesses will see less customers coming into their store, and as a result less revenue. What this means is we can probably expect smaller funding approval amounts.
Average Daily Balances - Similar to deposits, underwriters want to see that businesses keep high amounts of cash in the bank at the end of the business day. The reason for this is because they want to see that at any given moment, you can make the agreed-upon payment in exchange for the funding. In addition, many lenders typically like automatically withdrawing payments from a checking account first thing in the morning. So, at the beginning of the day, underwriting wants to make sure you have the amount in your bank to cover the payment. However, with less deposits as we already established a lot of businesses will see, generally overhead does not change, so therefore we can expect average daily balances will be lower, which might exclude some from getting approved for funding.
Negative Days/NSF's - It is safe to say that underwriting does not want to see negative days and NSF's, they don't want to see many bounced payments, for the reasons mentioned already. So businesses that already have a habit of going negative in their account, we can assume that it will be amplified even more during the recession. Unfortunately, if there are too many negative days we cannot lend to a company. There are no guidelines for this, it is on a case by case basis and other factors like overdraft protection can be taken into account.
Credit Score - Credit score is essential in determining eligibility for a business loan. Your social security number tells your life story, and so, therefore, lenders want to be able to see your ability to repay people, and in a timely manner. My intuition is that we will see many business owners forced to tap into their credit cards during a period of reduced receivables. As a result, that may influence the rates one gets approved for, they may end up with a higher rate.
In the past few weeks, we have seen serious damaging consequences from closing our economy. 15% unemployment rate, something we have not seen in over 100 years. It is important to remember that we will survive this, and all hope is not lost. If your business has been affected by COVID-19, or you are in need of working capital right now, click the button below to see your funding options with zero broker fees.