Explaining Our Underwriting Process

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Nick Moules
6th November 2014

In order to get a true understanding of our underwriting process, lenders need to know the right checks take place prior to listing. In this blog, we explain what happens in the time between receiving a loan application and a loan being listed on the Marketplace.

We receive a number of applications from potential borrowers every week. Currently only about 50% of all applications received will make it to the marketplace.

When borrowers apply we ask them for the previous two years of statutory accounts and a set of complete and recent management accounts. We’ll also ask them to disclose any additional borrowings the business has and for the directors to provide a statement of their assets and liabilities.

Scrutinising Accounts

Our first step is to check the integrity of the accounts provided by the borrower to make sure that they have been correctly prepared and represent a true and fair position of the business. Where we have any questions we’ll ask the borrower or their accountant to explain further.

While the integrity and suitability of the accounts are being assessed, we’ll conduct additional checks on the business and the directors using third party tools such as Experian, Credit safe and Companies House.  We use these third party ratings in our final risk rating of the business.

Often directors may be associated with a number of companies, past and present, we’ll look into these companies, and where any adverse information is found we’ll make a note of this and ask the borrower to explain.

Security

As all loans are secured on a minimum of a Personal Guarantee, where there are sufficient assets to support the loan requirement, we assess the statement of assets and liabilities provided by the directors. In this statement, the directors are required to state all their assets including property, cash, shares etc. as well as all their liabilities including mortgages, credit and guarantees to other lenders.

We will evaluate the statement and determine the estimated net worth of each of the directors to determine whether a Personal Guarantee is a suitable level of security for the loan. Where a loan is for over £50k we require additional security such as an All Assets Debenture or charge over a property.

For these we’ll run checks to determine the availability of the security and the suitability of it for the specific loan.

Risk Rating

Once all this information has been gathered we enter it into our risk rating tool, which will determine the risk rating of the business and the likely final rate of the loan. Using figures from both the management accounts and the statutory accounts, external ratings on the business and the directors, the risk tool rates the business using metrics such as loan affordability, liquidity, equity to debt and also takes into account the security offered by the borrower, the better the security the better the likely rate and risk rating.  The risk tool will then produce a risk score between A+ and D, only loans between A+ and C will be listed.

When a loan is scored below a C we will discuss this with the borrower and look at ways in which we could potentially improve their score, this may include reducing the loan amount, extending the loan term, increasing the level of security or alternatively reapplying in a few months after an improved period of trading.

When a loan is ready to list we’ll ensure that as much information as possible is disclosed to the lenders, such as the full statutory accounts, disclosures made to us during the underwriting process, answers to relevant questions ask of the borrower and where provided cash flow projections or other supporting information.

Informed Borrowers

Before any loan is listed, the borrower will be informed of their risk rating and likely final rate. They will then be asked to review the listing as it will be seen by lenders, and confirm that all information is true and fair. Once this is confirmed we will list the application on the marketplace for consideration of the lenders. 

When the loan is listed live lenders will have the opportunity to review all the information and ask any further questions of the borrower directly before deciding to lend.

Rejection and Re-application

Currently only about 50% of applications submitted to us are listed on the marketplace at some point. The most common reason for us rejecting an application include, insufficient turnover, inadequate loan affordability and insufficient security.

We know that the quality of our underwriting is one of the most important factors of our business and as a result we are committed to reviewing our risk rating and underwriting process every quarter to ensure that it is maintaining adequate results, updated according to industry practice and data and to ensure that we maintain a low level of business defaults.

 

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