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August 8, 2024— 8 min read

# How automated underwriting is changing SMB lending

Automated underwriting can help small businesses access capital faster and help lenders grow their portfolios. Learn how automated underwriting approvals work and how you can use them.

The Canopy Team

Fintech Contributing Author

Small businesses need help gaining access to capital in a timely and affordable way. Owners can have difficulty finding a lender, often don’t qualify for the right amount, and are left to deal with high costs once approved. Automated underwriting is a tool that SMB lenders can use to better serve clients facing these problems.

In this article, we’ll explain:

- What automated underwriting is and how it works.
- How it streamlines the process and helps both SMB lenders and their customers.
- What platforms lenders can use to get started.
- How automation can be used for the entire life of a loan.

## What is automated underwriting?

Loan underwriting has traditionally required underwriters to manually review financial documents such as bank statements, credit reports, and other information to assess a potential borrower’s risk. Automated underwriting uses technology, fast data access, and artificial intelligence (AI) to automate much of that process, reducing the time it takes to evaluate a borrower and minimizing human error.

Automated underwriting streamlines four main steps of the underwriting process:

1. **Data collection:** Financial data can now be collected much faster with technology such as application programming interfaces (APIs). Instead of borrowers figuring out how to get a PDF of their bank statements, pay stubs, and credit card statements, lending platforms can connect to bank accounts and payroll provider portals via APIs to retrieve this data in minutes.
2. **Data analysis:** Automated underwriting systems use algorithms and machine learning models to analyze the provided data. They can check the debt-to-income ratio and judge the borrower’s ability to repay much faster than a human underwriter alone and potentially with less error.
3. **Risk assessment:** Most automated underwriting systems provide a risk score based on the data analysis. This score predicts the probability that a borrower will default or miss payments.
4. **Decision-making:** Some automated underwriting systems will decide whether to approve a loan without human intervention if the loan is under a certain threshold. Human reviewers usually review the results of the automated underwriting system before making an approval decision for higher-risk applicants or higher-value loans.

## Underwriting automation streamlines the loan origination process

The traditional underwriting process is ripe for automation and disruption, especially in an age where more small-dollar loans such as buy now pay later (BNPL) are becoming commonplace. If a lender were to use automated underwriting to approve a BNPL loan, whether that be for a business or a consumer, they would see the following benefits:

- **Faster approvals:** It typically takes [1-10 days](https://www.fool.com/the-ascent/personal-loans/how-long-to-get-loan/) for a loan to be approved and funds disbursed. Automated underwriting can cut out manual processes and get a loan approved on the same day.
- **Increased efficiency:** Automated underwriting tools can do the number crunching while people work on more critical tasks.
- **Improved accuracy:** Machines can analyze large data sets more accurately than humans; smaller-value loans can be approved without human intervention.
- **Better customer experience:** A faster underwriting process creates a better customer experience that could increase future business from satisfied customers.

## How automated loan underwriting impacts SMB lenders

Automated underwriting provides the following benefits to both SMB lenders and SMBs themselves:

**More originations:** Faster loan application processing helps lenders handle and approve a higher volume of qualified applicants.

**Faster access to capital:** SMBs often don’t have weeks or months to wait for a loan decision. Faster access to funds allows customers to stay alive, which means less churn and higher annual recurring revenue (ARR).

**Simplified applications:** Automating the data collection part of the underwriting process makes things simpler for all.

**More competitive terms:** A streamlined underwriting process could allow lenders to offer better interest rates and terms—and offer them faster than their competitors.

### Challenges in automated underwriting lenders should be aware of

While automating the underwriting process provides many benefits, there are some potential setbacks to be mindful of:

**Data quality needs to be high:** Ensure that the data you’re getting is accurate and from trusted sources only.

**Human intervention:** Certain complex cases or dollar thresholds should trigger a human review.

**Regulatory and compliance issues:** Ensure compliance with all relevant regulations and standards.

## What automated underwriting systems can SMB lenders use?

Several automated underwriting platforms can help SMB lenders incorporate automation into their underwriting and origination processes. These platforms support the underwriting process in various ways.

### Data aggregation and enrichment

Data aggregation platforms like Plaid, Finicity, and MX can help lenders gain instant access to borrower data via open banking APIs that connect financial accounts to lending platforms.

### Automated underwriting decision engines

Companies like Ocrolus, LendFlow, and Experian offer products that use algorithms and machine learning engines to assess borrower data and create a loan risk score.

## Automation goes well beyond underwriting and origination

Automating the underwriting process can help you grow your loan portfolio while increasing efficiency and cutting costs, but you still need to service all those new customers for the life of their loans. That’s where automated loan servicing takes over.