Most likely, you will need a loan at some point in your life. But, as with most things, there are right and wrong ways to do it. Here are some important tips on how to get the loan you want.
You must write a loan proposal if you want to get a loan. Make sure your first loan proposal and application are as good as they can be, because you might not get another chance.
Your proposal should always start with a cover letter or an executive summary. You'll need to include a lot of different things. Explain who you are, what your business background is, what kind of business you have, the amount and purpose of the loan you want, the terms you want to pay it back on, how the money will help your business, and how you will pay it back. Keep this cover page easy and straight to the point.
Many different loan proposal formats are possible. You might want to talk to your lender to find out which format will work best for you. When you write your proposal, don't assume that the person reading it already knows about your industry or your business. Always include details about your industry so that your reader can understand how your business works and how trends in your industry affect it.
What the business does:
Include the following information in a written description of your business:
- Service or good
- Type of business or group
- Where it is
- People *
- The date of the info
- A contest
- Suppliers
- Planned Operation for the Future
- A short history
Management Experience: Each owner's and key management member's resumes.
Personal Financial Statements: The SBA wants all principal owners (20 percent or more) and guarantors to fill out a personal financial statement. There shouldn't be more than 90 days between financial statements. Attach a copy of your federal income tax return from last year to the financial statement.
Loan Repayment: Write a short statement about how the loan will be paid back, including where the money will come from and when. This statement should be backed up by cash-flow schedules, budgets, and other relevant information.
Existing Business: Provide financial statements for at least the last three years and a current statement (no older than 90 days) that includes balance sheets, profit and loss statements, and a reconciliation of net worth. There should also be a schedule of long-term debt and a list of how old the accounts payable and accounts receivable are. Other important balance sheet items from the most recent statement should also be explained.
Proposed Business: Give a pro-forma balance sheet that shows where both equity and borrowed funds come from and where they are spent.
Projections: Give an estimate of how things will go for at least a year or until you can show a positive cash flow. Include estimated income, costs, and the reasons behind these estimates. Profit and loss should be the format for the projections. Explain the assumptions you made if they are different from the current trend or industry standards, and back up your projected numbers with clear, backed-up explanations.
You must also send in the following, if they apply:
Lease (copies of proposal)
Franchise Agreement
Agreement to Buy
The company's founding documents
Plans and instructions
Licenses on file
Reference letters
Intention letters
Contracts
Partnership Agreement
List the real estate and other assets that will be used as collateral. Few banks and credit unions will lend money without collateral. Every loan should have at least two clear ways to pay it back. The first source is usually cash flow, which comes from the business making money. The second source is usually the security that is put up to get the loan.
Credit: The 5 C's
The goal of your bank is to make money. So, when a bank gives money to someone, it wants to make sure it will be paid back. Every time the bank gives a loan, it has to think about the 5 "C's" of credit. If you know about the 5 C's of Credit, your chances of getting a loan are much better.
The ability to pay back the loan is the most important of the five factors. The person who might give you the loan will want to know how you plan to pay it back. The lender will look at the cash flow from the business, when the loan will be paid back, and how likely it is that the loan will be paid back. Payment history on personal and business credit relationships is seen as a sign of how well someone will pay in the future. Possible lenders will also want to know about other ways you can pay back the loan.
Capital is the money you put into the business yourself. It shows how much you stand to lose if the business fails. Before you ask for money from lenders or investors, you will need to put your own money and assets into the business and be willing to take financial risks yourself. If you have a lot of money invested in the business, you're more likely to do everything you can to make it a success.
You can give the lender even more security through collateral or guarantees. If the business can't pay back the loan, the bank wants to know that there is another way to get the money back. Assets like equipment, buildings, accounts receivable, and sometimes even inventory can be used to pay back a loan if the bank sells them for cash. Personal and business assets can both be used as security for a loan. On the other hand, a guarantee is a written promise from someone else that they will pay back the loan if you can't. Some lenders may want a guarantee like this in addition to collateral to secure a loan.
Conditions are based on what the loan will be used for. Will the money be used as working capital, to buy more equipment, or to stock up on goods? The lender will also look at the local economy, both in your field and in other fields that could have an effect on your business.
Character is what a potential lender or investor thinks about you as a person. The lender will use his or her own judgement to decide if you are reliable enough to pay back the loan or make money for investors in your business. We'll look at what you've learned in school and how much business and industry experience you have. The background and experience of your employees and how good your references are will also be taken into account.
Now that you know these simple tips on how to get a loan, you should be much more likely to get the loan you want. The key to money is to know what's going on.
