SEF Blog

As a commercial underwriter, I am frequently asked why underwriting requires so much documentation from potential customers. While some large lenders can get away with asking for less documentation, most underwriters require a potential customer to submit several supporting documents, including financial statements, balance sheets, an principal owner’s information, before they will consider lending to them. While there are several reasons underwriters require this documentation, it all comes down to risk.

The financial documents that a customer provides to an underwriter will be used to analyze such things as net worth, debt to worth and available liquidity. Each of these, as well as the rest of the information provided in the documents submitted, allow an underwriter to evaluate a potential customer’s risk from various angles. Here are some of the documents required and how they help underwrites evaluate risk:

Financial Audit

The financial audit can provide an underwriter with several key figures needed to make a sound decision of a potential customer’s credit risk. Audits allow an underwriter to see details regarding a business’ cash flow, revenue, and expenses. This can reveal the stability of the business from a financial standpoint. The audit also lists a business’ debts.

Aged Accounts Receivables and Payables

The accounts receivables and payables allow an underwriter to see how a potential customer makes payments and how their customers are paying them. They are typically broken down into payment categories: 1-30 days, 31-60 days, 61-90 days and 91+ days. Ideally, these documents would reveal that the potential customer is making and receiving payments within 60 days. Seeing accounts receivables and payables in the 61-90 or 91+ ranges concerns underwriters since this indicates the customer is not paying bills on time and would likely be late with loan payments.

Interim Financial Statement

Interim financials provide an underwriter with a snapshot of how the business is faring financially in the current year. Based on the numbers, an underwriter should be able to predict how the business should end the year if all factors remain the same. They can then compare these numbers to the previous year to gauge their financial standing and to see if any revenue trends are revealed.

These documents and others are required by underwriters because the contents allow them to examine the risks lending to an organization may pose. Without the proper documentation, an underwriter will not be able to make an informed decision about the potential risk a new customer may be to the lender. This is why it is so important to receive this information in a timely fashion from potential customers. The sooner a potential customer can submit this documentation to an underwriter, the faster the underwriting process will go.

If you are looking for a loan and have questions regarding documentation, please call Sustainable Energy Fund at 610-264-4440.