How to develop a loan proposal for your business

One of the least understood concepts is how to make an effective loan presentation to a lender. A borrower is often told to create a business plan and to include various required documents. This generic approach may result in the loan request being relegated to a stack on the loan officers desk and perhaps a rejection. If you wish to have any chance of success, you need to develop a strong external business plan. The internal business plan that you develop as your management and operating guide contains more details than a banker has time to read. An internal business plan is for your use and helps you stay on track for the goals you have established for the business. A winning loan presentation has substantially more sizzle than a business plan designed as a personal planning tool. It may also use a more aggressive interpretation of the pro forma operating numbers.

To obtain outside financing it is important to be well prepared and have the information that a lender needs to make a decision. Approval of your loan request depends on how well you present yourself, your business, and your financial needs to a lender. Lenders want to be assured that your business will repay the proposed loan and that there are sufficient assets (collateral) to pay off the principal in the event the loan goes in to default. You must provide the lender with these two assurances in a clear and concise format. Lenders reject loan requests when they cannot understand the risk or the risk is greater than acceptable to them. Keep in mind that an acceptable entrepreneurs risk is often greater than an acceptable lenders risk.

Choosing the right lender

Do not scatter your loan requests to many lenders. Instead, tailor it to the specific lender most likely to grant your request. The first lender to consider is the bank where you currently maintain your bank account, as it is more difficult for a lending institution to reject a customer. However, you need to obtain some preliminary information before preparing and presenting your loan request.

  • Do they finance start up companies?
  • Do you determine the size of loan you require?
  • What are the lenders minimum collateral requirements?
  • Does the lender make equipment or working capital loans?

Do not hesitate to switch to a lender that can better accommodate your borrowing needs. When reviewing a loan request, the lender is primarily concerned about repayment. To help determine this ability, many loan officers will order a copy of your credit report from a credit reporting agency. Avoid making a formal submission if there is not a good chance of being approved because other lenders may find out that you were turned down when they run a credit report.


Business Plan / Proposal

A well prepared business plan demonstrates managements ability to focus on long term achievable goals, provides a guide for effectively implementing the articulated goals once the capital has been committed and constitutes a yard stick by which actual performance can be evaluated. Any potential lender or investor will expect to be presented with a meaningful business plan.

Positive first impressions of the proposal are very important in order to instill confidence in the viability and management of the business. If it is necessary to submit the proposal because it was incomplete or poorly prepared that fact alone could influence the final decision and result in your application being rejected.


The Cover Letter

The cover letter that accompanies your loan request is your first opportunity to sell your loan. Make it great! Lenders have been known to reject loans after reading a poorly constructed cover letter or one that is so impersonal that the presentation looks like it is being sent to every institution in town. Relate the cover letter to specific discussions you previously had with the loan officer and verbal understandings. The cover letter should be no more than one or two pages long. Explain how the loan will be used. Highlight the strongest aspects. Note the weak points and how you plan to overcome them. If you collateral is particularly strong, emphasize it in your cover letter. It should include the name, address and telephone number of the business and the names of all principals. In the description of your business, describe its unique aspects and how or why those aspects will appeal to consumers. Emphasize any special features you feel will appeal to customers and explain how and why these features are appealing.

Always recommend approval of the loan as your final thought rather than meekly asking the loan officer to call if there are any questions. If you cannot recommend your loan to the loan officer, do not expect the loan officer to recommend it to the loan committee.