From the Desk of Brian Seaman,
VP Underwriting
April 23, 2024

The Mysteries of Underwriting Revealed

Did you ever get the impression, while applying for a loan, that your loan rep plays "good cop," while casting "the underwriters" as the bad guys who might stand in the way between you and your business vision? Sometimes we get a bad rap. But trust me. Just like your loan representative, we're here to help you make your business grow.

When your loan representative says, "It's up to the underwriters now," when you're inquiring on the status of your application, they're telling it to you straight. Once you've filed all of your docs, we get to work with a set of qualitative and quantitative criteria that we, as risk managers, use to determine your creditworthiness. In a sense, we act like your hyper-vigilant financial manager or controller, ensuring that you're not over-leveraging your business.

These considerations help us in developing a holistic, 360-degree view of your business's health and likely performance in the near and far term. Let's take a look at them in greater detail:

Cash flow is king

Typically, we're going to look at least three or four months of records. But even then, we understand blips on the chart. For example, if you're running a candy store on the boardwalk of a shore town, you're not going to have a booming winter, are you? Or if you just opened a new location that's just establishing itself, your cash flow, at least on paper, might not look so healthy.

Do you have a plan?

If a business comes to us and they say they just want to pad their cash balances, that's not a great reason to incur debt. It's going to eat their margins instead of fueling profit. I like a thoughtful reason for seeking funding. Many of our construction clients, for example, want to bid on a big job, but need to know they can then follow through with the hires, the equipment, and the materials they'll need to get the job done.

Giving credit its due

Credit scores play a role in an application decision, though at Fora we consider them in concert with the other criteria noted here. It's part of our holistic approach. In most cases, we're looking at an owner's personal credit score, since their firm may not be well enough established to have its own rating. In these cases, the criteria follow well-known conventions.

  • How long of a credit history is there?

  • How many accounts are open?

  • Is there a solid payment record?

  • How much of their credit are they using?

Keep in mind that when it comes to underwriting, all debts are not created equal. We look upon a home mortgage or high limit credits cards as higher-quality debt than, say, a low limit department store credit card, since you had to pass through more hoops to get those loans. So if someone has only a few years of credit but has a perfect payment record on their home's mortgage and manageable balances on their high limit credit cards, that's encouraging.

How is your marketplace faring?

Our underwriters are constantly monitoring the performance of the industries in our portfolio. Because we have a large and well-diversified, set of customers, we have a unique view of what kind of headwinds to look for when a market is facing challenges.

Consider an industry like residential solar energy, for example. Right now, the market is saturated with players, and the government has been sunsetting a lot of subsidies, resulting in lower consumer demand. For these reasons, it's an industry in which we'd fund only the top-quality businesses in that space — those with a proven plan for continued success.

Closely related to this consideration are supply chain issues. Is your firm dependent on materials that face production and/or transport challenges? One unfortunate example of this is the recent loss of Baltimore Harbor's Key Bridge. Many businesses who rely on shipments to and passing through that channel are bound to experience shortages that will impact their cash flow and bottom line. On the other hand, healthcare is one of a few industries doing well. We've also seen a remarkable bounce back for restaurants and other in-store retail operations following the turmoil they faced during the pandemic.

Behold the power of Google

We use several data providers to research information on a business's history, beyond what the applicant may share. But you'd be amazed at just how much you can turn up on Google by simply googling the name of the business and its owners! We've often found details of red flags such as liens, legal judgments, and bankruptcies, and even criminal activity.

Another important, yet seldom discussed area is a firm's legal and compliance record, particularly in businesses like healthcare, construction, and other industries with strict safety regulations and codes of conduct. If a construction firm, for example, has been cited in violation of workplace safety standards, this infraction could cost them thousands — even millions — if a fatality or a severe injury were to occur. In that case, the agreement would go into default. So we take these kind of violations very seriously.

Your story matters

One of the great advantages of the one-to-one relationships that Fora builds with its customers is our ability to listen — literally — to their needs. What's the story behind the application? Is the applicant making good on a longstanding dream, having spent years researching their business concept? Did a one-time catastrophic event ding their credit and make them unattractive to banks?

Speaking with our customers holds as much value as running a deal through our official evaluation processes. In a conversation, we can gauge a customer's character and get a gut feeling about their viability as a potential client. It's all part of the holistic approach we take with not only underwriting, but the entire application and ensuing customer experience.

I hope I've succeeded in demystifying the work of the underwriter — and proven how we're really out to help you get the boost your business deserves.

Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.