How to Prepare a Loan Proposal
One of the first steps in starting a business is to develop a well written business plan (get tips here). This plan describes your business’ mission and objectives and how you intend to achieve these goals. Your business plans is also an essential foundation for a small business loan application.
I say your plan is a "foundation" on purpose. Your business plan won’t necessarily guarantee a successful loan approval, no matter how well thought out it is. You are going to need a unique loan proposal - and that proposal is going to need pizzazz!
Lending institutions typically look to a potential borrower’s loan proposal for evidence that your business has strong management, significant experience, and a thorough understanding of the marketplace.
They’ll also look for relevant financial information showing net worth and sales projections that will make good on your ability to repay the loan. Lastly, any lender will want to know about your suppliers, distributors, employees, and manufacturing relationships.
So how do you go about piecing all these components together into a winning loan proposal?
Remember, lenders do want simply to make loans - they want to make loans to companies that can repay them. Below are some tips that will help your business improve its chances of obtaining a small business loan with a properly prepared written proposal.
The best advice you can get on this topic is from the Small Business Administration (SBA) Finance Start Up resources. Here are they steps they recommend for developing your loan proposal:
Step 1: Before you put pen to paper, there are four things you need to be able to clearly address in your plan:
- Who you are (your business profile)
- How much money do you need?
- How you will repay the loan (projections, etc.)
- What will happen if you can’t repay the loan?
- Summary - Like all good executive summaries, this is the last thing you should write, even though it sits at the front of the proposal document. Use it to summarize how the loan will be used, repaid, and the benefit it will bring to your business.
- Senior Management Profiles - Summarize key experience, qualifications and credentials, and be sure to include back-up detail in resume format.
- Business Description - Include your business history and a summary of current activity. You can summarize information from your business plan to show you understand the market and your industry. If you have company collateral, such as brochures, include these too.
- Projections - These include projected income and cash flow statements for 2-3 years. Be prepared to answer questions about what happens if your assumptions don’t materialize.
- Financial Statements - You must include business and personal financial statements and anticipate questions about fluxes and any major trends in your statements. You may also need to submit your income tax returns for the previous three years.
- Loan Purpose - This is why you are doing the paperwork in the first place! Explain in a detailed statement how you will use the funds.
- Amount - Be realistic about what you need and confident about how much you will be loaned. You are negotiating your future business growth after all.
- Repayment Plan - These will be assumptions, since you don’t know yet what the lender will finance. Outline your preferred repayment terms, but assume that this will need to be negotiated with your lender based on their risk assessment of your business.
The SBA has lots more advice on choosing the right bank and presenting your loan proposal to them as well as next steps for when your loan is approved or rejected. Check out their tips here.
You can also get more help on the different requirements needed when applying for a business loan as opposed to an SBA-guaranteed loan here.
More tips on preparing a loan proposal from other bloggers can be found here:
- How to write a Successful Business Loan Proposal
- Elements of a Successful Loan Proposal
- Making Your Loan Proposal Count
