Half the Picture

Why do some loans or finance applications stall during the underwriting phase? Aren’t underwriters interested in getting projects financed as quickly as possible? Yes and no. When a customer decides that financing their project or piece of equipment is a good alternative to paying cash, several critical things have to happen.

First, the client has to provide the requested financials in a complete form; not tax returns with missing schedules or partially submitted financial statements. Often financials are incomplete; the initial underwriting review is done and the missing parts are identified and requested from the client again. Sometimes all the missing parts are not caught during initial review and they have to be requested later but when dealing with a large volume of documents, you can understand how this can happen. In either case, the missing information and going back and forth can slow the process by days or even weeks.

The next part is the verification phase; this can be tedious since all the reported earnings, assets and ownerships have to be double-checked and verified. A company with multiple assets and income streams can take several days to fully verify. The lender needs a clear picture of who owns what and where the money is generated. After all, without proving income and collateral, the numbers on a financial statement are meaningless.

The final step is determining if the ratios including debt to income and overall leverage is within the guidelines of the lender. Is the client debt too high? Will the income stream continue for the term of the finance? Can the cash flow service this new debt? There are formulas for all these key indicators but typically, the final approval involves a committee “approve” or “not approved” decision. Even at this final phase, supporting information may be requested.

Considering the losses in the financial industry during the last few years and particularly in 2009, the underwriting review is simply one which most lenders are not willing to rush right through. Patience, once again, is a virtue.