By: Alan Haut
Lender Relations Specialist
North Dakota District Office
Approval of your loan request depends on how well you present yourself, your business, and your financial needs to the lender. The best way to improve your chances of obtaining a loan is to prepare a written loan proposal or business plan. Lenders look to a loan proposal as evidence that your business has strong management, experience, and a thorough understanding of the marketplace. They will also look for relevant financial information that demonstrates your ability to repay the loan.
To help determine your ability to repay the loan, lenders will often order a copy of your personal and business credit reports from one of the three major credit bureaus: Equifax, Experian, or TransUnion. Before you even start the process of preparing a loan request, you will want to make sure that your credit history is accurate and that any errors in the report have been corrected. To get copies of your credit report or to correct any errors, contact the credit reporting agencies. If you need help to repair your credit history, contact a local credit counseling service.
Before you begin writing your proposal, there are four things that you need to be able to clearly address:
- How much money you need.
- How your business will use the money.
- How you will repay the loan.
- What you will do if your business is unable to repay the loan.
There are many different formats you can use for a loan proposal. You may want to contact the lender to determine which format is preferred by the lender. Generally, a loan proposal should include these elements:
- Executive Summary. Begin your proposal with a simple and direct cover letter or executive summary. Clearly and briefly describe who you are, your business background, the nature of your business or start-up, and how the loan will be used to help the company succeed.
- Business Profile. Describe the history of your business and summarize current activity and results. Describe your market, your customers, and your industry.
- Management Experience. Describe the experience, qualifications, and skills of each owner and key member of your management team.
- Loan Request. State the amount of money you need and how you determined this amount. Include quotes for equipment or supplies, for building costs, etc. In short, be able to answer the question, “Why do you need that amount of money?” Also explain specifically what the loan will be used for and why it is needed.
- Loan Repayment. Describe the terms you hope to receive (interest rate, term, etc.). Show how you can meet that repayment schedule based on sales and cash flow projections. Keep in mind that loan terms will need to be negotiated with your lender based on their risk assessment of your business.
- Collateral. Describe collateral you would be willing to pledge as security for the loan. Every loan program requires at least some collateral that can be sold in case the cash generated by the small business isn’t sufficient to repay the loan. All loans should have at least two identifiable sources of repayment. The first source is ordinarily cash flow generated from profitable operations of the business. The second source is usually collateral pledged to secure the loan.
- Personal Financial Statements. Include financial statements for all owners with 20 percent or more interest in the business. These statements should not be more than 90 days old. Some lenders may also require tax returns for the previous one to three years.
- Business Financial Statements. Include complete financial statements (balance sheet, income statement, and reconciliation of net worth) for the last three years plus a current interim financial statement (not more than 90 days old). If you are just starting out, provide a projected balance sheet and income statement.
- Equity Investment. An owner must put some of his/her own money into the business to get a loan; the amount depends on the type of loan, purpose and terms. Equity can be built up through retained earnings or by the injection of cash from the owner. Most lenders want to see that the total liabilities or debt of a business is not more than four times the amount of equity.
- Projections. Provide projected income and cash flow statements for at least one year or until positive cash flow can be shown. Be prepared to answer questions about how you will change operations if you don’t reach your projections.
Other Items (if applicable)
- Lease (or copies of proposal)
- Franchise agreement
- Purchase agreement
- Articles of Incorporation
- Partnership agreements
- Copies of business licenses and registrations required for you to conduct business
- Copies of contracts you have with any third parties
The SBA reduces risk to lenders by guaranteeing major portions – up to 85 percent – of loans made to small businesses. This enables the lender to provide financing to small businesses when funding is otherwise unavailable on reasonable terms.
When a small business applies for a loan, the lender will review the loan and decide if it requires additional support in the form of an SBA guaranty. The lender will then contact SBA regarding a guaranty. SBA programs require a lead lender.
Your goal in preparing a loan proposal is to show the lender that your business or start-up is a sound investment and will generate solid returns. Planning and preparation are key aspects to receiving the financing you need in your business. Free and confidential assistance in preparing a business plan and financial projections is available from local SCORE and Small Business Development Center counselors.
Alan Haut has been a Business Development Specialist and Loan Officer for the U.S. Small Business Administration since 1989, having received a Bachelor of Science and Masters of Business Administration from Minnesota State University-Moorhead. He can be reached at email@example.com.