Financing Basics | Estimating
Costs | Finding Capital | Personal
vs. Business | Applying for Small Business Loan
| Small Business Lenders |
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Breakeven Analysis | Financial Statements
Applying for a Small Business Loan
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
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 it.
Description of Business:
Provide a written description of your business, including the following information:
- Type of organization
- Date of information
- Product or service
- Brief history
- Proposed Future Operation
Management Experience: Resumes of each owner and key management
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.
Existing Business: 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.
Proposed Business: Provide a pro-forma balance sheet reflecting
sources and uses of both equity and borrowed funds.
Projections: 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
Collateral: 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 a loan.
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 your business.
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.
For Additional Information:
Read the Small Business Administration's guide to Preparing
and Presenting a Loan Proposal
Use the Small Business Administration's Loan Package