The Science of Commercial Loan Underwriting Services

The Science of Commercial Loan Underwriting Services
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Financial institutions are involved in several operations, from investment advisory to asset management. Among all the operations, lending is a complex one for financial institutions. Lending institutions cannot offer loans to just any loan applicant. Rather, loans are offered only to those capable of timely repayments. 

For the same rationale, lenders do not approve loans for entities with poor credit scores. The risks are even higher for lenders offering high-value commercial loans. Commercial loan providers count on their underwriters to reduce the risk of default. Loan underwriting is a crucial step in loan origination for commercial lenders.

Read on to understand more about Commercial Loan Underwriting Services.

What Exactly is Commercial Loan Underwriting? 

Businesses or companies often require funds for their operations. Many corporate entities apply for loans to expand their businesses. Loans offered to businesses or corporate entities for diverse purposes are called commercial loans. Such loans are usually high-value and riskier for the lenders. Commercial loan underwriting is a specific process in the lending industry that helps approve or reject loan applications. Lenders can determine the creditworthiness of businesses before distributing commercial loans through underwriting. Underwriting also allows lenders to set the terms and conditions of the loan. The underwriting process for commercial loans can sometimes be complex, as concerned professionals have to go through company financials. 

The origination process starts with a business or corporate entity applying for a commercial loan. If the company is an existing/old customer, the lender might have ample details for evaluating the risk. Lenders also have details of companies with pre-approved commercial loan offers. For a new customer, the lender must collect details for credit analysis. These details include company financials, company fundamentals, existing debts, and the business’s legal structure. Once the financial institution has ample details regarding the borrower, underwriters get into the action. Commercial loan underwriters are skilled individuals who can analyze the credit risk associated with any borrower.

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Borrower Data Examined During Commercial Loan Underwriting

The following details are validated or checked during commercial loan underwriting:

  • Company Experience:The company’s age or experience in a particular industry is a strong consideration during commercial loan underwriting. Some lenders might refrain from giving high-value loans to unsettled or new companies in the market.
  • Value of the Collateral:Since commercial loans are high-value, lenders cannot approve them without collateral. Different types of collateral would be real estate properties, equipment, inventory, and marketable securities. The lender can seize the collateral when a company fails to repay the loans. Underwriters pay special attention to choosing the right collateral when approving commercial loans.
  • Credit Score or Value:Credit evaluation is essential in commercial loan underwriting services. Loan underwriters cannot approve the loan without determining the credit score of the borrowing company. A company’s credit score will depend on its previous loan payments, debts, and other factors.
  • Financial Spreads of the Company:Financial spreads of a company give accurate information about the current financial position. Financial spreads include balance sheets, tax returns, and other financial statements. Underwriters closely examine the financial spreads to determine the credit risk associated with the borrower.

Besides the details mentioned above, underwriters focus on many other areas. For instance, lenders now consider ESG (Environmental, Social, and Governance) factors for approving commercial loans. As of now, lenders refrain from offering commercial loans to unsustainable companies. 

Who Offers Commercial Loan Underwriting Services?

Lending institutions can rely on in-house employees for commercial loan underwriting services. The lending institution must have funds required for hiring and training in-house underwriters. Small lending institutions might need more funds to hire underwriters on a large scale. The lending institution might have to hire more underwriters as the business increases. Lenders must also provide in-house underwriters with the digital and automated systems required for credit analytics, ESG scoring, and other processes. Some lenders even adopt technology on a large scale to digitize loan underwriting processes.

Lenders can also try third parties for commercial loan underwriting services. When lenders outsource their underwriting processes, they have the time to focus on other core competencies. Lending institutions can reduce operational costs by outsourcing the loan underwriting process. Reputed third parties have dedicated teams of experienced underwriters for handling commercial loans. You do not have to go through the hassle of hiring and training underwriters with the help of an outsourcing partner. A reputed third party will help you with every step of loan origination, including loan underwriting.

Conclusion

Commercial loan underwriting services are essential for financial institutions. A lender can only offer commercial loans after analyzing the creditworthiness of borrowers. Lending institutions can partner with third parties to reduce the in-house burden of loan underwriting. It will help the lending institution to minimize operational or in-house costs of loan underwriting. Choose a reputed third party for commercial loan underwriting services.

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