How Loan Decisioning Works

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If you're a business owner, you know how tough it is to secure a loan. The waiting game can be especially frustrating when your business could really use the funding now. Fortunately, automated loan decisioning software has made this process simpler for banks and credit unions across the country by removing some of the more time-consuming steps from their workflow.

The process of loan decisioning is usually done in stages. The very first stage of loan decisioning is to review a business owner’s ability to repay the loan, as well as any other information they provide about their financial situation. As you can imagine, this step typically takes quite some time and involves several steps that are out of human control (like receiving tax documents).

Automated loan origination software helps banks and credit unions make near-instant decisions about small business loans. Making faster loan decisions doesn’t need to involve higher risk or worse portfolio performance, but it does mean making choices with the right data.

Here’s how it works.

Loan Decisioning Stages

The first step to faster loan decisions is understanding the basic underwriting process, as well as each stage a loan moves through before being approved or declined. This process can vary from institution to institution but it generally looks something like this:

  1. Application – A business owner applies for a loan and provides all the necessary documentation.
  2. Underwriting – The prospective borrower’s information is verified for accuracy, legal standing, and so forth, while their application is reviewed to determine if they meet the institution’s credit qualifications.
  3. Credit decisioning – A designated reviewer will make an official recommendation regarding the approval or decline of the application. 
  4. Closing – If approved, additional documentation is requested and reviewed before closing on the loan.

While each step has its own metrics for success, automated systems can help ensure nothing gets overlooked by lending teams so business owners don’t have to wait any longer than necessary for their loan to be approved or denied. You can see some of the specifications Wells Fargo looks for here.  alt text: lender calculates loan approval in loan decisioning process

Loan Decisioning For Lenders

For lenders, the process of loan decisioning can be a complex workflow. New business may be submitted to a loan officer, who then takes it through an approval process with the bank’s credit committee. 

The next step is for a designated reviewer to make an official recommendation regarding approval or decline of the application. From there, the loan moves on to other departments and workflows that may require even further review. This process can be tiresome and long, resulting in missed steps or higher risk for lenders.

In order to make a better, faster loan decisions with minimal risk, lenders need to align their processes and technologies around the most efficient workflow. In other words, they need an automated lending solution that is capable of making fast decisions about small business loans – without compromising on accuracy or security.

The Benefits of Automated Loan Decisioning

Automated loan decisioning is the process of using technology to speed up loan origination and improve decision-making. It’s ideal for banks and credit unions that want to increase their approval rates, lower operational costs, or both while maintaining high standards of risk management.

With automation, consistency is inherent; every decision is based on the same set of data and logic. This means the approval and denial processes are fairer, more objective, and free of human bias.

The cost savings alone can be significant. Instead of paying a team of underwriters the market rate every time they make a decision, an automated loan decisioning system allows more loans to be approved at a lower cost.

However, it’s important to point out that automating the loan origination process doesn’t mean sacrificing accuracy or risk management standards. In fact, automation can help banks and credit unions make better decisions by improving data quality and reducing manual errors.

Data from McKinsey has shown Benelux bank saw a 30% increase in efficiency when it moved to an automated lending process.

How Automated Loan Decisioning Works

An automated loan decisioning system works by providing a series of questions that allows the lender to determine whether or not they can approve a loan application at an acceptable level of risk.

It’s important to note that every bank has different decision points, so the decisioning process is unique to each lender.

The loan decisioning system typically consists of five stages or steps.

First, there is usually an initial pre-qualification stage where basic information about the business, such as the number of employees and annual revenue is collected in order to determine what type of loan can be offered.

Additional questions are then asked that allow the lender to better understand the financial health of the business, such as credit history and cash flow.

At this point in the process, a decision has typically been made to either deny or accept an application for funding under specific terms.

If accepted, more questions are asked about collateral offered on top of personal guarantees from principals involved with the loan. Once all information is added to the system, it is then processed for automated underwriting.

Unlike traditional manual loan origination, in which the process would be done by a lender who would simply go down the document checklist one by one to make their decision, automated loan origination software makes use of advanced algorithms that can assess these types of applications within seconds. These systems are designed with built-in logic and reasoning, allowing them to make near-instant decisions about small business loans with minimal risk.

Best Loan Decisioning Software

Businesses looking to dive into the world of automated loan decisioning software should consider the type of software they’d like to use. There are two main types of automated loan origination systems:

  1. Online decisioning
  2. Human-assisted decisioning

When deciding on the best loan decisioning software for your business, it’s important to consider not only which system will perform the task better but also how much time and money you want to spend on automation.

For businesses that place a heavy emphasis on the speed and accuracy of automated loans, automated decisioning is the best choice.

For businesses that would like additional support from dedicated lending experts throughout the process, going with a system that offers both automated and human-assisted loan origination might be best.

Once your business has decided on an online or human-assisted system for its automation needs, it’s time to move on to the next steps.

Here are a few tips for setting up your automated loan origination software:

  • Identify which tasks you want to be automated and which require human input or oversight. In some cases, it might be best to have certain scenarios managed by a team while others are handled by automation, depending on how much risk is involved.
  • Determine which business processes can be standardized and made more consistent, allowing for a smoother transition to automation and ensuring you’re choosing the right system. For example, if most loan applications come from similar geographic locations or use a standardized application form, it might make sense to set up automated decisioning around those factors.
  • If you do choose a human-based system, you’ll want someone with the right expertise and experience making these decisions. Deciding which loan applicants to approve can be more of an art than a science. Anyone involved in the process should have access to data that indicates how well certain borrowers perform over time and whether they pay on time without missing any payments or falling behind.

Once you have an automated loan decisioning system in place, it’s easy to make changes when additional data becomes available. For example, if your business does more international sales than expected or customers begin requesting loans for new purposes (such as purchasing equipment), adding the necessary factors and information is quick with automation software.

Get Started With High-Quality Loan Decisioning Software

Loan decisioning can be a long and complex process for banks and credit unions. It involves many different people with various levels of expertise making subjective decisions based on their experience.

Automated loan origination software helps banks and credit unions make near-instant decisions about small business loans, which speeds up the process and minimizes manual errors. 

Businesses with the ability to automate these systems will benefit from faster, more streamlined loan decisions.

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