You can have a profitable business, excellent customers, and a perfectly legitimate need for financing, and still walk away from the underwriting process empty-handed.
Why? Because knowing how to run a successful business and knowing how a bank evaluates that business are two very different things.
Most business owners approach financing applications the same way they approach everything else in their companies: they gather the requested information, answer the questions, and expect a reasonable decision.
Unfortunately, bank underwriting doesn’t always work that way.
Your application isn’t simply a request for money. It’s a financial presentation that will be examined, questioned, classified, and evaluated against a lender’s internal requirements for risk/investment.
The way you present that information to them can have a significant impact on the outcome.
Having worked in as an executive in the banking industry for so long, I’ve seen how financing applications are evaluated and how avoidable mistakes can complicate otherwise promising deals.
Here are three of the most important mistakes business owners make when entering the bank underwriting process, and what you can do differently.
UNDERWRITING MISTAKE #1
Applying for Financing Before You Understand What Your Financial Statements Actually Say
You know your business. You know how much money you’re making, what your expenses are, and whether your company is growing. So when a bank asks for your financial statements, you gather up the paperwork, send it over, and assume the numbers will speak for themselves.
But here’s something most business owners don’t realize: Each and every financial document you submit tells the underwriter something different about your company. That’s why they ask for so many different reports from you. Spreading out the financial picture of your company over several documents, as opposed to one, gives the bank an opportunity to evaluate whether or not all the reports align to tell the same story.
Your Balance Sheet shows what your business owns, what it owes, and how much value remains in the company after its debts are accounted for. It gives the underwriter a picture of your company’s overall financial position at a particular point in time.
Your Profit and Loss Statement (P&L) tells a different story. It shows how much revenue your company generated, what it spent to operate, and whether it made or lost money over a specific period. A company can show a profit on its P&L while still having very little cash available to pay its bills.
Your Accounts Receivable Aging Report tells the underwriter something else entirely. It shows which customers owe your company money, how much they owe, and how long those invoices have remained unpaid. A business might report impressive sales, but if a substantial portion of those sales hasn’t been collected, the underwriter is going to want to know why.
And then there are your business tax returns. These allow the underwriter to compare what you’ve reported to the government against the financial information you’ve provided to the bank. Missing returns, late filings, unpaid tax obligations, or significant differences between your tax records and financial statements can all raise additional questions.
Now consider what happens when these documents are reviewed together.
Your P&L shows that your company made $200,000 in profit last year. Sounds pretty good, doesn’t it? But your Balance Sheet shows very little cash, your Accounts Receivable Aging Report shows $300,000 in unpaid customer invoices, and your tax returns haven’t been filed for the most recent year.
Suddenly, the underwriter has questions. Where did the profit go? How much of that outstanding money is actually collectible? Why haven’t the tax returns been filed? Are the financial statements current and accurate?
There may be perfectly reasonable explanations for every one of those questions. But if you haven’t reviewed your own paperwork before submitting it, you may not even realize those questions are coming.
Remember, the underwriter doesn’t know your business the way you do. The underwriter knows what your paperwork tells them.
The Mistake
Submitting financial documents without understanding what each report reveals about your business, whether the information agrees across those reports, or what questions missing, outdated, or inconsistent paperwork might raise.
What the Underwriter Sees
A collection of financial records that must be examined individually and compared against one another. Differences between reported profits, available cash, unpaid invoices, outstanding debts, and tax records may raise concerns about the company’s financial condition or the accuracy and completeness of its documentation.
How to Avoid This Mistake
Remember the Bank’s mission is to evaluate your business as being worth investing their money into or just being too much of a risky venture for them. Before applying for financing, make sure your financial paperwork is complete, current, properly organized, and ready for review.
Examine your Balance Sheet, Profit and Loss Statement, Accounts Receivable Aging Report, and business tax returns together. Make sure you understand what each document says about your company and why any significant differences exist.
Check that your financial statements cover the appropriate reporting periods, that your accounting records have been properly reconciled, and that required tax filings are up to date. If something is missing or needs correcting, address it before submitting your application whenever possible.
If there are legitimate reasons why certain figures appear inconsistent, be prepared to explain them and provide supporting documentation.
The objective isn’t to change what your financial statements say. It’s to understand exactly what they say, make sure your paperwork is in order, and be prepared to answer the questions an underwriter is likely to ask.
UNDERWRITING MISTAKE #2
Asking for the Wrong Type of Financing to Solve the Right Business Problem
This one happens more often than many business owners realize.
A company needs $150,000 to cover payroll, materials, and operating expenses while waiting for its commercial customers to pay.
The owner walks into a bank and asks for a $150,000 business loan.
Seems reasonable, doesn’t it?
But here’s the problem. The company doesn’t necessarily need to borrow $150,000 for several years. It needs access to cash that’s temporarily tied up in its invoices.
Those are two very different financing situations.
A traditional term loan may require fixed monthly payments regardless of when customers pay their invoices. Depending on the lender, the business may also face collateral requirements, personal guarantees, and underwriting standards designed for a different kind of transaction.
Meanwhile, an appropriately structured accounts receivable financing arrangement may address the company’s cash-flow timing problem more directly.
That doesn’t automatically make invoice financing the better or cheaper option. It means the financing structure needs to match the business problem.
The Mistake
Deciding what financial product to request before determining which funding structure actually fits the company’s cash-flow needs.
What the Underwriter Sees
An application evaluated against the requirements of the product requested, even when a different financing structure might be more appropriate.
How to Avoid This Mistake
Start by identifying exactly why your business needs funding.
Are you purchasing equipment? Expanding facilities? Financing inventory? Covering the gap between invoicing customers and receiving payment?
Those circumstances can call for different financing solutions.
Structure the financing around the business need, not simply around the dollar amount you want to receive.
UNDERWRITING MISTAKE #3
Treating the First Financing Offer as the Final Deal
Getting approved for financing can feel like crossing the finish line. After supplying financial statements, answering questions, and waiting for underwriting, the lender finally says yes. Most business owners, at that point, are understandably relieved. They want to sign the documents, receive their funding, and get back to running their companies.
And that’s precisely when an expensive mistake can happen.
An approval tells you that a lender is willing to provide financing under certain conditions. It does not necessarily tell you that those conditions are the best available for your business. Consider a company offered an invoice financing deal with an attractive advertised rate of only 2-4% for invoices paid within 30 days by their customers.
The owner focuses on the fact that they can ensure they get 98% of the cash the company will receive immediately. But the agreement may also contain minimum monthly fees, reserve requirements, additional service charges, renewal provisions, early termination penalties, or a bunch of other hidden gotcha-clauses that change that picture from the business owner’s favor to the bank’s favor fairly readily.
Depending on the agreement, those provisions can substantially change the total cost and flexibility of the financing arrangement, costing tens, or even hundreds of thousands more than the business owner realizes.
The headline rate on the term sheet is only one part of the deal. Why else would it need to be 15 pages long? Think about that for a moment.
Before Accepting a Financing Offer, Examine These Terms
- Total financing costs, including additional fees
- Advance rates and reserve release conditions
- Minimum volume or usage commitments
- Personal guarantees, recourse, and collateral requirements
- Renewal provisions and notice requirements
- Early termination and exit penalties
How to Avoid This Mistake
Review the complete financing agreement before signing, not merely the approval letter or advertised terms.
Understand what the arrangement will cost under your actual expected business volume, including what happens if sales increase, decline, or customers pay later than anticipated.
Where appropriate, negotiate terms that better reflect your company’s operating requirements and financial circumstances.
Getting approved is important. Getting approved under the right terms is what protects your business after funding.
The Biggest Underwriting Mistake is Going Into this Process Unrepresented.
Think about the amount of preparation you put into negotiating a major customer contract.
You review the requirements, calculate your costs, consider your risks, and make sure the agreement makes financial sense before committing.
Your financing deserves that same attention.
Yet many business owners enter the underwriting process without anyone independently reviewing their application, evaluating the financing structure, or examining the terms being offered.
The lender has its underwriting department, its procedures, and its legal documents. They have professionals working to protect their interests. Shouldn’t you have a professional working to protect yours?
CashForCompanies.com – We Represent You…Not the Banks.
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