In the world of business debt, underwriting refers to the formal process that a lender uses to make a lending decision: yes or no, and if yes, how much and with what terms?
The underwriting process typically examines:
- credit worthiness
- credit needs
- collateral value if appropriate
- the ability to repay.
As you might imagine this process can vary quite widely in intensity, techniques and time depending on the type and size of loan, and the kind of organization doing the underwriting. For example, an online Fintech provider of a $10,000 six month loan will use a different and faster underwriting process than a credit union considering a $1 million five year SBA loan.
Many debt providers consider their underwriting process to be somewhat proprietary. Unfortunately this means lenders are often not transparent with how they come up with their answers to lending requests. Small businesses often express frustration that the underwriting process seems like a mysterious “black box.”
Underwriting By Investment Bankers and Insurance Companies
In the world of investment banking, the term underwriting refers to the process leading to a commitment by an investment bank to purchase some percentage of a securities offering that they, in turn, are helping to sell to investors, if any of those securities go unsold.
In the world of insurance, the term underwriting has a similar meaning: assessing risk systematically and determining the details of an insurance policy, which ends up with the assumption of those risks after issuing the policy.
As you can see, whether or not it’s a community bank, an investment bank, or an insurance company, underwriting means that a financial organization is going through a process that ends up with the assumption of some type of risk: repayment of a loan risk, sale of securities risk, or insurance risk.