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Applying for a
(This information has been prepared by the U.S. Small Business
When applying for a loan, you must prepare a written loan proposal.
Make your best presentation in the initial loan proposal and application;
you may not get a second opportunity.
Always begin your proposal with a cover letter or executive summary.
Clearly and briefly explain who you are, your business background,
the nature of your business, the amount and purpose of your loan
request, your requested terms of repayment, how the funds will benefit
your business, and how you will repay the loan. Keep this cover
page simple and direct.
Many different loan proposal formats are possible. You may want
to contact your commercial lender to determine which format is best
for you. When writing your proposal, don't assume the reader is
familiar with your industry or your individual business. Always
include industry-specific details so your reader can understand
how your particular business is run and what industry trends affect
Description of Business:
Provide a written description of your business, including the following
Type of organization
Date of information
Product or service
Proposed Future Operation
Resumes of each owner and key management members.
Personal Financial Statements:
SBA requires financial statements for all principal owners (20%
or more) and guarantors. Financial statements should not be older
than 90 days. Make certain that you attach a copy of last year's
federal income tax return to the financial statement.
Loan Repayment: Provide
a brief written statement indicating how the loan will be repaid,
including repayment sources and time requirements. Cash-flow schedules,
budgets, and other appropriate information should support this statement.
Provide financial statements for at least the last three years,
plus a current dated statement (no older than 90 days) including
balance sheets, profit & loss statements, and a reconciliation
of net worth. Aging of accounts payable and accounts receivables
should be included, as well as a schedule of term debt. Other balance
sheet items of significant value contained in the most recent statement
should be explained.
Provide a pro-forma balance sheet reflecting sources and uses of
both equity and borrowed funds.
Provide a projection of future operations for at least one year
or until positive cash flow can be shown. Include earnings, expenses,
and reasoning for these estimates. The projections should be in
profit & loss format. Explain assumptions used if different
from trend or industry standards and support your projected figures
with clear, documentable explanations.
Other Items As They Apply:
Lease (copies of proposal)
Articles of Incorporation
Copies of Licenses
Letters of Reference
Letters of Intent
List real property and other assets to be held as collateral. Few
financial institutions will provide non-collateral based loans.
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.
The 5 C's of Credit
Your bank is in business to make money. Consequently, when a bank
lends money it wants to ensure that it will be paid back. The bank
must consider the 5 "C's" of Credit each time it makes
Capacity to repay is the most critical of the five factors. The
prospective lender will want to know exactly how you intend to repay
the loan. The lender will consider the cash flow from the business,
the timing of the repayment, and the probability of successful repayment
of the loan. Payment history on existing credit relationships -
personal and commercial - is considered an indicator of future payment
performance. Prospective lenders also will want to know about your
contingent sources of repayment.
Capital is the money you personally have invested in the business
and is an indication of how much you will lose should the business
fail. Prospective lenders and investors will expect you to contribute
your own assets and to undertake personal financial risk to establish
the business before asking them to commit any funding. If you have
a significant personal investment in the business you are more likely
to do everything in your power to make the business successful.
Collateral or guarantees are additional forms of security you can
provide the lender. If the business cannot repay its loan, the bank
wants to know there is a second source of repayment. Assets such
as equipment, buildings, accounts receivable, and in some cases,
inventory, are considered possible sources of repayment if they
are sold by the bank for cash. Both business and personal assets
can be sources of collateral for a loan. A guarantee, on the other
hand, is just that - someone else signs a guarantee document promising
to repay the loan if you can't. Some lenders may require such a
guarantee in addition to collateral as security for a loan.
Conditions focus on the intended purpose of the loan. Will the money
be used for working capital, additional equipment, or inventory?
The lender will also consider the local economic climate and conditions
both within your industry and in other industries that could affect
Character is the personal impression you make on the potential lender
or investor. The lender decide subjectively whether or not you are
sufficiently trustworthy to repay the loan or generate a return
on funds invested in your company. Your educational background and
experience in business and in your industry will be reviewed. The
quality of your references and the background and experience of
your employees will also be considered.