The Underwriting Process of Alternative Lenders

If you received your funding, it wasn’t just luck. An underwriter, broker, or algorithm assessed your business’s risk and decided you qualified, at a certain cost, often free for business owners. Knowing what criteria they used can demystify why you got the amount and terms you did, and it highlights areas you should pay attention to going forward. 

In essence, the underwriting process is a snapshot of your business’s health at funding time. The better you can maintain or improve from that snapshot, the smoother your relationship with the funder will be and the more options you’ll have.

For instance, with a line of credit, if you slip below that snapshot (say revenues drop significantly or you take on a lot more debt elsewhere), you move into a risk zone that wasn’t originally contemplated, and the funder will likely react (tightening or at least not extending more credit).

Common red flags for funders and brokers include recent bankruptcies, outstanding tax liens or judgments, very volatile revenue (big drops), or undisclosed existing loans. If, during underwriting, they discovered, say, you already had another funding you didn’t mention, that’s a trust hit. If you have any of these lurking, or if they develop later, be mindful. Underwriters assume that no news is good news. Here’s a peek into how some underwriters at alternative lenders think:

Cash Flow is King

Traditional bank loans heavily weigh credit scores and collateral; alternative lenders focus more on cash flow and revenue trends. In underwriting your application, they likely examined your recent bank statements line by line. Key factors include your average daily bank balance, monthly revenue totals, and the presence (or absence) of overdrafts or NSF (bounced) transactions. These paint a picture of how you manage cash. A healthy average balance and few (or no) overdrafts signal that you usually have a cushion, a good sign for funders. 

Numerous NSFs or a balance that frequently dips near zero are red flags (they indicate you might struggle to handle new payments). For instance, MCA underwriters use a simple metric: they try to ensure your daily payment won’t exceed a certain percentage of your average daily revenue (often targeting around 10-20%). Indeed, they often cap the advance amount at roughly 1/10th to 1/5th of annual revenue. If your annual gross is $500k, you might see offers in the $50k-$100k range. This is not generosity; it’s to ensure the payment (maybe $200-$300/day on a $50k advance) is theoretically sustainable from your cash flow. For you, this means if your revenue drops post-funding, you’ve moved outside the underwriters’ safety zone – a place you need to navigate carefully.

Credit Card Sales and Industry Type

If you’re in a business with significant credit/debit card transactions (like retail or food service), underwriters heavily factor your monthly card sales volume. High card volume is attractive for MCAs because it’s easily verifiable and can be auto-split to repay (some MCAs take a percentage directly from the merchant processor). The underwriter likely checked how consistent your card sales are and if they’re trending up or down. They might also benchmark you against industry norms – certain industries are viewed as riskier or more seasonal. 

For example, a landscaping business might get a smaller advance in winter when their receipts are low. Underwriters assume you will continue in the pattern of your recent past. Thus, any unusual spikes or dips in your statements would be scrutinized. 

Time in Business and Prior History

Most alternative funders have a minimum time-in-business requirement (often 6 months to 1 year). Beyond that, the longer you’ve been operating, the more data they have to trust you’ll stay around. They also often check if you’ve had previous financing (MCA or loans) and how you handled it. If you’ve successfully repaid an advance before, that’s a big plus. Some underwriters will approve a renewal or second position for more money after seeing just a couple of months of good repayment history. Be cautious with this flattery – just because they offer, doesn’t mean you should take (remember the stacking issue). But from their side, a track record of repayment is gold. If this is your first go, they rely on surrogates like personal credit score or business credit report just to ensure no glaring issues (e.g., unresolved bankruptcies or major liens).

Personal Credit and Guarantees

Unlike banks, many MCA or alternative lenders don’t place huge weight on FICO scores (some don’t even check it). However, some do, especially for larger loans or lines of credit. A decent personal credit might have gotten you a slightly better factor rate or higher approval. Additionally, you likely signed a personal guarantee (PG) – most alternative financings require the owner to be on the hook personally, even if the debt is to the business. Underwriters see a PG as extra security: it signals you have personal skin in the game, and they can pursue personal assets if the business fails to pay. 

“Paper Grades” and Risk Pricing

In the MCA industry, underwriters often bucket deals into grades (A, B, C, D paper) which correspond to risk level and thus the factor rate or interest charged. For example, Grade A might be a business with strong revenues, long time in business, maybe >700 credit, no existing debt – they get the best rates (perhaps a factor of 1.2 and a larger advance). Grade C or D might be a newer business or one with some negative marks (occasional NSFs, lower credit, etc.) – they still fund it, but at a factor of 1.45 or 1.5 to compensate, and maybe a shorter term. The fact that you have the funding means you passed the “approve” threshold, but the cost you’re paying was decided by those factors.

Takeaway: If your rate was high, the underwriter saw significant risk. Improving those factors (higher revenues, better credit, fewer NSFs) could help you get a better deal next time – or even give you leverage to refinance this one if you show a few months of improvement.

Works Cited:

Innovative Finance Playbook. (2025). Alternative Underwriting. Retrieved June 2, 2025, from https://playbook.innovative.finance/chapters/alternative-underwriting/ Innovative Finance Playbook

Pattamatta, P. (2022). Underwriting with alternative and cash flow data. FinTech Futures. https://www.fintechfutures.com/data-privacy-security/underwriting-with-alternative-and-cash-flow-data