How do business loans work: As a loan processor, you put together information about a borrower and organize it in a neat package so the underwriter can evaluate and approve the requested mortgage. You’ll open the loan file, verify the borrower’s information, and submit the package to the underwriter for an ultimate decision. Although specific steps may vary depending on your employer and any federal, state, or local laws, the basic steps to process a loan are roughly the same.
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How do business loans work
1. Get the types of Business Loans
Not all small business loans are created equal. There are many different types.
Term Loans
When most people think of business loans, term loans come to mind first. With a term loan, you receive a lump sum of money upfront and repay it over time, usually through fixed monthly payments or installments. Term loans typically are unsecured, meaning you don’t need collateral such as commercial property or equipment to take them out.
SBA Loans
The U.S Small Business Administration offers a variety of loans partially guaranteed by the SBA and issued by private lenders; these loans may be available to businesses banks won’t lend to due to risk. Programs include 7(a) loans for a wide variety of purposes, 504 loans to repair or purchase assets, and microloans of $50,000 or less.
Business Line of Credit
A business line of credit is a flexible loan that works like a credit card. It can be secured or unsecured. Upon approval, you can withdraw funds up to a set credit limit. You then pay interest on what you’ve borrowed. A business line of credit is ideal if you’re a seasonal business, need to pay for working capital, or have emergency cash at your disposal. You pay interest on the credit used.
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Equipment Loans
Equipment loans are exactly what they sound like: loans to help you pay for new or used business equipment, such as heavy-duty machinery, computers, and other types of technology. Since the loans are secured to the equipment and the lender can seize the equipment if you default, equipment loans may be easier to acquire.
How do business loans work
2. Know about Other Business Loans
Other business loans you might investigate include:
- Commercial real estate loans: Loans to purchase land or commercial buildings you need.
- Business auto loans: Loans to buy cars, vans, and trucks your business needs.
- Specialized loans: Medical-practice loans help physicians start a business, while farm loans help create, expand, or maintain a family farm.
- State loans: Some states offer small business loans, including for businesses facing difficulties acquiring financing.
How do business loans work
3. What You Need To Apply for a Business Loan
Most lenders will request certain documents and information when you apply for a small business loan. Before you begin the application process, ensure you have the following on hand:
- Legal documents: Business licenses and registrations, articles of incorporation, franchise agreements, and commercial leases
- Business plan: Outlining who you are, what you do, and how you intend to use the funds to meet your goals
- Income tax returns: Business returns and personal tax returns of owners
- Financial statements: Balance sheets, income statements, and statements of cash flow; accounts receivable and payable; financial projections
- Resumes: To demonstrate the management team’s experience
- Business credit report: To showcase your business history regarding borrowed money
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Get the Step-by-Step Guide
Once you’re ready to apply for a small business loan, follow these steps.
4. Shop Around
Research and explore various lenders and loan products. You can look at government organizations such as the SBA, credit unions, online lenders, and large and small banks. Alternative funding sources may be found through nonprofit lenders and crowdfunders. Find a lender that offers the lowest rates and best repayment terms, and watch out for hidden fees that can increase the overall cost of your loan.
5. Gather Your Documents
You’ll need various business and financial documents to apply for a business loan. Ask your potential lenders which documents you’ll need. Collecting the proper documentation in advance could speed up the application and approval process.
How do business loans work
6. Apply
After choosing a lender, it’s time to apply. Before you submit your application, double-check it for errors, as they can lead to delays with approval and funding. Respond when lenders reach out to you with document requests; doing so demonstrates you’re a serious borrower and may speed along the application process.
See also: 10 Tips to Apply for Business Working Capital Loans
7. Get the Funds
If you’re approved, wait for the distribution of funds. While online lenders offer fast funding, the SBA and banks may take days or weeks to send funds. Don’t be afraid to check in with the lender if it’s taking longer than expected.
8. Contact the loan officer. The loan officer acts as the intermediary between you and the borrower, and they can answer any questions you have about the loan. If you have any questions about the information, the loan officer can answer them.
- Read through the application and other documents received first to make sure you understand everything about the loan before you get started with the processing. If you have any questions, it’s better to ask them as soon as possible.
How do business loans work
9. Enter loan information into the computer system. The bank or lending company where you work will have its own system for entering information about each loan you process. Enter the information you’ve received accurately and completely.
- If the computer system prompts you for information you don’t have in the loan file you received, contact the loan officer as soon as possible so you can get this information filled in.
- The computer system will generate deadlines for various processing steps to be completed, and may send you reminders when a deadline is approaching.
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10. Order the borrower’s credit report. If the borrower was pre-approved, the loan officer may already have pulled the borrower’s credit report and included it in the information sent to you. If not, you’ll have to order one.
- You may need a credit report from each of the three major credit reporting bureaus. If the loan officer only checked one, you may still need to order the other two.
How do business loans work
11. Order an inspection or appraisal. The mortgage company may require an inspection or appraisal of the property being purchased before the loan can be approved. Depending on your employer’s rules, it may be your responsibility as a loan processor to order these.
- Since inspections and appraisals can take time, if you know you need to order them, do so as soon as possible during processing.
- The underwriter will review the inspection and appraisal to determine the value of the collateral for the loan. Some states may have additional requirements, such as certification that there are no termites on the property.
12. Start a title search. The title search for the property will reveal whether there are any outstanding liens or other claims against the title, which could affect the value of the property.
- It’s possible that the loan officer has already set the wheels in motion for the title search, or you may be responsible for handling this on your own.
13. Check the borrower’s income sources. The borrower’s income is perhaps the most important part of their loan package, because it determines their ability to pay back the loan. Typically you’ll be looking at the borrower’s tax returns or pay stubs going back a couple of years.
- The borrower’s education and employment history can be just as important as the amount of their income.
- For example, if you have a borrower in their mid-20s who just graduated with a professional degree and has started working full-time in that field, their income probably will increase as they gain experience in their field.
- You may need additional information to verify the borrower’s income if they are self-employed. Request this information as soon as possible to avoid any unnecessary delays.
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14. Evaluate the borrower’s assets. The borrower may have other property that either could generate income on its own or could be liquidated to pay debts if necessary. The value of these assets will affect the amount of the loan that gets approved.
- Assets are particularly important if the borrower has limited or fixed income, perhaps because they’re retired.
- When assessing value here, take into account whether the borrower has used that property as collateral on another loan.
How do business loans work
15. Analyze the borrower’s outstanding debts and credit history. The borrower’s credit report provides a snapshot of how that borrower handles credit. Compare their outstanding debt to their income, and check for missed payments.
- Your employer will have basic standards that must be met. If the borrower doesn’t meet these standards, they may need to provide additional information. For example, if a borrower has an unacceptable number of late payments on their report, the lender may require an explanation.
16. Get proof of insurance. All lenders require borrowers to prove that they have homeowner’s insurance, or can get homeowner’s insurance for the property. Your employer will have set coverage standards that must be met.
- Homeowner’s insurance protects the property, which is being used as collateral for the loan. While the homeowner is still paying their mortgage, the insurance protects the lender as well as the homeowner from loss.
- If proof of insurance wasn’t submitted with the original loan application, work with the loan officer to get documentation from the borrower.
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17. Review the file. Before you send the file off to the underwriter, take a moment to look through all the information and documents in the file and make sure everything is complete and accurate. Check for errors and contact the loan officer if you need clarification on anything.
- As you review the file, note any possible red flags or other cause for concern. This saves the underwriter some time as they go through the file.
- Make sure the file follows the underwriter’s formatting and organization guidelines. If documents or information are presented in the wrong order, it could impact the loan’s approval.
How do business loans work
18. Request any additional reports of documents. The underwriter requires specific documents and information in each loan file. If you found missing documents in your review, contact the loan officer as soon as possible.
- If you’ve found any red flags, you also might want to get the borrower to explain them. For example, suppose the borrower missed three payments on a car and had it repossessed. The borrower may be able to provide information that would help excuse them for that fault.
19. Forward the loan package to the underwriter. Once you’re satisfied that everything in the loan package is complete and in an acceptable form, it’s ready to move on to the underwriting process.
- You may be required to send the package through a supervisor first, who will review your work and point out any changes that should be made. This is especially likely if you’re just starting out as a loan processor.
20. Work with the underwriter to resolve any problems. The underwriter may issue a “suspense” on the loan if they require more information for processing. They may go directly to the loan officer for this information, but frequently as a loan processor you will act as an intermediary between the underwriter and the loan officer.
- In some cases, such as if the issue is related to a note or comment you made on the file, the underwriter may go to you directly for an explanation.
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How do business loans work
21. Know the Collateral
Some business loans require collateral, which is something valuable your business owns. This may be equipment, inventory, invoices, or commercial real estate. If you fail to make your loan payments, the lender can take your collateral and sell it to recoup some of their losses.
A collateral secured loan is only a good idea if you’re confident you can repay it according to your contract’s terms. However, a loan secured with collateral will also usually offer lower interest rates.
Conclusion:
If you’re a startup or newer business with a limited credit history, you might find it easier to qualify for an unsecured loan that requires collateral.