How do we Evaluate Loan Applications? Our Lead Underwriter Explains

luminosAt, we carefully assess the viability of every loan application that comes our way. To learn more about this process and understand what makes a business the best fit for our community, we’ve interviewed Philip, our lead underwriter and part of our underwriting and credit risk team, so he can answer some frequently asked questions.

1. What do you look for in a business whose application we will accept?

We look for growth in turnover and profitability, good cash management, sound investment decisions from previous borrowings and evidence that the loan from us will strengthen the business for the future. All this should be predicated on true and fair answers to my questions. Sometimes an applicant will not answer my questions truthfully. Difficult to believe, I know, but I assure you it can happen. However, a company that honestly meets the criteria above is highly likely to be listed on the platform.

2. What are some red flags that you often see? What will lead to a rejection?

Any identified deliberate misrepresentation will lead to an immediate refusal, and not treating my questions seriously will not enhance the applicant’s chances of a listing. Sometimes applicants attempt to hide information from us; this is when I ask questions to which I already know the answers. If I do not get the correct answer (often through negligence or incompetence) and I have to ask them to reconsider the answer they have given me, their chance of achieving a listing diminishes. Very often things are blamed on their external accountant. This is because we have no way of testing this advice and certainly no way of holding the accountant to account. However, in my experience, most poor decision making is done contrary to the advice of the accountant and he is a scapegoat when things go wrong. If I believe that the business is being run exclusively for the personal benefit of the directors and shareholders and that a loan from us is likely to be used for their personal benefit rather than to build up the company I will consider a refusal of listing. Likewise, some applicants will insist that audits have been completed or planning consent received when in fact those tasks are still in process. I am also very suspicious of applicants who refuse to file their completed accounts on the public record and say that their accountant has advised them not to do this; I don’t believe a word of it.

3. What accounts do we ask for and why?

We ask to see 2 complete years of statutory accounts which are filed on the public record at Companies House plus a third set of accounts from the beginning of the new financial year to a fairly recent date. This is to give the lenders a short recent history of the business and for them to see what the current position is.

4. What does our underwriting process involve?

I am a bit uncomfortable with describing it as underwriting, a word commonly associated with the insurance industry. A successful journey through the question and answer process that I control does not generate any guarantee or insurance for the lenders. I see my job as forensic accounting because it is an analytical process that attempts to come to a conclusion about the veracity of the accounts and tries to enhance the credibility of the figures and the disclosures so that the lenders have a reasonable basis on which to start their own decision making process.

To assess applications, we use our own risk tool which uses standard financial analysis based upon the critical data in a company’s financial statements to facilitate an overall view of the performance of the company. Specifically the tool looks at the liquidity, profitability and capital adequacy of an applicant; it also allows for an experienced subjective judgment, based upon other factors, to be made about the company and to influence the final decision about whether or not to list the application on the platform. We also use external ratings agencies to bolster our underwriting process.

5. What should lenders keep in mind when reviewing an application?

Lenders should make their own assessment of the application from the information disclosed and the Q&A on the platform. Forensic accounting is not a substitute for their own assessment, it is only an attempt to remove obvious inconsistencies and provide information that a reasonable lender should have a right to see. Lenders should be aware of the significant limitations in accounts generally and that my job can not remove these limitations to any large degree.

6. What is your background and experience?

I am a Fellow of the Institute of Chartered Accountants in England and Wales (ICAEW) and also a barrister (member of the Bar of England and Wales). My career has always been in accountancy and since the time of my qualification in 1981 I have worked in the industry as finance director and in regulation as a member of the secretariat developing accounting standards for the profession. More recently I have spent some years in the teaching and training field. Until June 2015 I was a long standing member of the Council of the ICAEW and the profession’s Ethics Advisory Committee. I helped to develop the risk tool that is an essential part of our underwriting function.

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