Are you about applying for a loan? If YES, here is a complete guide on how to write a perfect business loan proposal that will convince lenders to give you money.
There is one thing a business needs to start off and sustain itself prior to when it starts making its own money, and that thing is finances. A lot of times, a lot of small business owners do not have the money to finance or sustain their businesses, and the only other option that comes to mind is to take out a business loan. But before you start soliciting for a business loan, you must have to prepare a business loan proposal.
What is a Business Loan Proposal?
A business loan proposal is usually seen as a sales pitch you share with your bank or your lender. Having a good business loan proposal is the best way to improve your chances of obtaining a loan. A solid business loan proposal also will show the lender that your business is currently in a good financial standing and is capable of repaying a loan.
Approval of your loan request depends on how well you present yourself, your business, and your financial needs to the lender. If the lender is not convinced on what you need the loan for, you may not get an approval.
Your plan should contain detailed information about the management of your firm, the company’s finances and what you need the loan for. Lenders look to a loan proposal as evidence that your business has strong management, experience, and a thorough understanding of the marketplace. As such, your business loan proposal should leave your banker convinced that you actually know what you are doing.
Your business loan proposal is your chance to make a good impression on the lender about your business, and if your proposal is not up to standard, not only would you get ‘denied’ stamped on your proposal, but you may not get another chance to pitch a subsequent one.
There are a lot of formats one can follow when writing a loan proposal, but we are going to show you the proper way to go about it so that you would not skip out any necessary information that can jeopardize your chances of getting the loan.
Why Write a Business Loan Proposal?
A properly written loan proposal is requested by lenders for a lot of reasons, but the main reason is that the proposal can give the lender a condensed picture of where your business stands financially. It can reflect the strength of your management, or maybe its weak points. If done correctly, your loan proposal can also reinforce your deep knowledge of your market, your industry and at the same time, your business.
A small business lender can look at the loan proposal and get a clear picture of your cash flow position as well as your future cash flow and revenue projections. If your loan proposal contains all the required information, the lender could almost make the lending decision without going any further.
10 Things your Business Loan Proposal Must Contain
It takes a lot of information to accurately represent your business. So, you’ll want to make sure you include your most impressive facts and figures in your business loan proposal. But you’ll also want to try to keep it short as possible. You also must use very simple language when writing your proposal so that it can be easy to understand.
- Information about your business
The first sentence of your loan proposal should always be who you are and how much you are requesting. From there, you can then start to be more detailed about your business, but not so detailed that your proposal would become long and boring.
The basic information you ought to include here are your business name, business entity structure (S-corp vs. C-corp, LLC, sole proprietor, etc.), time in business, current annual revenue, current number of employees, if applicable
- Your business model
Another thing that needs to be in your proposal is what products or services your business provides. How does it serve the customer? Describe your typical customer, your market base, industry growth, and your competition. Make sure you indicate how your business generates income. This is especially important when a lender is looking to extend you credit and wants to feel safe about the probability of repayment.
- What you need the business loan for
Every lender would like to know what you want to use the money you are asking for to do. That’s why your business loan proposal should include a detailed description of your planned use of the funds, along with any ancillary information about expected and variable costs, the quality of the investment, and its impact on your business.
For example, if you plan to purchase a large piece of manufacturing equipment, not only will the lender want to know about the equipment but also about the company from which you’re making the purchase.
- Proof of repayment
This is the section where you get right down to the numbers. Here, you have to state the loan amount you wish to receive and show the lender how you plan to repay it. Demonstrate this by referring to your cash flow projections, which you’ve so carefully calculated based on your previous year’s cash flow reports, P&L statements, and your current balance sheet. Show how you plan to fit the new debt repayment into your current budget and indicate how the new loan will help increase income to facilitate that repayment in the future.
- Information about previous business debts
If you have any other outstanding debts, you’ll need to furnish detailed information on them. You should include the individual or company’s name, address, contact information and amount of the debt in question. Note that if this information is not included, it would generally be requested, so there is no point hiding it.
- Relationship with lender
List your relationship with the lender—if you have one. If you have any checking, savings, or investment accounts or any other loans with that bank, list them here. Let them know you’re a loyal customer and that you want to continue doing business with them.
If you are close friends or business partners with a key customer of the bank, explain that as well. Let them know that if they say “no” to your loan, your friends can find out about it, which may hurt that bank’s business. If you have no relationship with that lender, remove this section from your loan proposal.
- Your personal and financial background
When requesting for a loan, you should know that the lender would want to be privy of your financial details including that of any business partners and management team you have. This means they need names, addresses, and contact information on any partners you have. And you can expect to have to furnish tax returns, bank statements, and credit reports.
- Professional background information for your management team
While you’re gathering personal information regarding your management team, you’ll need to indicate whether any of them have previous management experience or industry-related experience that applies directly to your current business.
- Links to your online market
Every business needs a way to market and advertise their product or service. This is where you show the lender that you are proactive in trying to cultivate new business. Briefly list any social media sites you use—like Facebook, Yelp, etc.—plus your website URL. If you use any other methods of advertising or reaching out to industry-specific groups to attract new business, include those here as well.
- Your business documents
You may have made a lot of claims in your business loan proposal, so now; you need to bring up evidence to support your claims. These evidences should be in form of your business documents. You would need to attach your balance sheet, Profit & loss statement, cash flow statement, financial forecasting/projections etc.
Writing a Perfect Business Loan Proposal – A Complete Guide
Your small business loan proposal will often be the first contact a banker has with your company, so you need to craft a document that presents your business in the best possible light. For a business loan proposal to be properly appreciated, it has to come in various sections, and these sections should explain one aspect of the business at a time. Here is a step by step format on how to write an acceptable business proposal.
Step One: Write the Term Sheet
This is the place to begin with when you want to write your loan proposal. It is basically your first and your opening page. This section should be just a page long and this is where you should write what you want from the lender. Therefore, your term sheet should include the amount of money you need from the lender, the interest rate you can afford to pay, and your method of repayment. Other things you should include are; the collateral you are offering and your personal guarantors, but all these should be brief.
Step Two: Your Executive Summary
The Executive Summary is where you should write be a brief summary of the business and its owners, as well as how you are going to repay the loan. This section should be covered in a page, but two pages on the maximum. It should include;
- Brief financial description of business: that is if the business is a startup, if not, how long you have been in business, and what industry you serve.
- Use of funding: that is what you are going to use the loan for, and you must be specific about this. If you’re not crystal clear on why you’re looking for a loan and what you’re going to do with the money, don’t bother asking for the loan.
- Management experience: that is the experience you and your management team have in the business. If you don’t have experience, list any training courses you’ve taken, books you’ve read, or other information that shows you’ve spent time, effort, and energy learning about the business.
Step Three: Your Credit Report
This page is where you have to present your credit report. If you do not have it yet, you can visit AnnualCreditReport.com to check your credit through the official free service. Save a copy of your credit report and then print it out and insert it into this section of your loan proposal.
If you have any negative marks on your credit report, you may have to highlight them and write a brief explanation on what happened and why it happened, and what you learned from the experience. Bankers want to know that you have learned from your past mistakes so that you won’t make the same mistake again. And remember to keep it short. If your credit report is excellent with no negative marks, then just leave it at that.
Step Four: Provide Photo Proof
A lot of people may not see this section as a priority, but it is very necessary to insert photographs to show proof of your business. You may just need to take some photos of your employees, offices, workspace, and building. If you are a start-up and have no photos of operation yet, just use professional headshot photos of the key management team members. This section just aims to appeal to the human side of the lender to show them that a lot of people have a stake in your business.
Step Five: List your Professional Relationships and their Experience
Here you will list your accountant and attorney and any other important professional relationships you may have. You have to make sure your accountant and attorney are highly qualified so that your business would be taken seriously.
You don’t need the most expensive professionals on your team, you only just need qualified ones so that your lender can be impressed. If you know your bank uses a certain law firm, you should use that law firm if they can handle your needs, and they are not too expansive. You should dedicate one or two pages to this, but no more.
Step Six: Loan Request and Repayment
You have now come to the kernel of the business loan proposal. This is where you have to state the amount of money you need and how you determined this amount. Include quotes for equipment or supplies, and for building costs, etc. Here, you should be able to answer the question, “Why do you need that amount of money?” Also explain specifically what the loan will be used for. Other things to include in this section are;
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. Bankers want collateral, and this is one of the things that can either make or mar your loan application. If you don’t have business assets you can offer, consider other sources of repayment such as personal investments or home equity. Asking for a big loan without any collateral is unlikely to succeed. If you intend to secure the loan with collateral, make sure the loan term doesn’t exceed the useful life of the item you’re using.
For example, a bank won’t secure a 20-year loan against a computer that has a projected shelf life of two years. 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.
Your personal guarantors: Bankers always want you to personally guarantee the loan. You should indicate if you would personally guarantee the loan, of if you are bringing another person to do that.
Step Seven: Your Equity Investment
A business owner is required to put some of his or 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.
Step Eight: Your Financial Statements
This is the section the banker will spend the most time looking at as it is the primary reason for the proposal. In this section, you should include; copies of the last two years’ tax returns for yourself personally and for the business (if applicable), a personal financial statement for each of the managers of the business, full financial statements for the business itself, preferably prepared by your accountant.
Additionally, you should include the personal tax returns and financial statement of any owner with a minimum 20 percent stake in the company. The proposal must contain a balance sheet and income statements reflecting the firm’s most recent financial activity.
For a startup business, produce statements detailing projected income. These projections may help your case, although the bank may pay more attention to your personal financial statements if you are starting a new enterprise.
If there are any negative marks on your personal financial statement, or if there’s anything about your personal finances that you need to explain, write a brief note at the bottom of your personal financial statement explaining it. If your business is a start-up, then just show projected (pro forma) financial statements of cash flow and a pro forma income statement.
Step Nine: Your Business Plan
This is the most important section of the loan proposal. You must have a well-written, complete business plan included in your loan proposal. Most banks will not even consider giving you a loan without a business plan. You need to keep your business plan brief so as not to lose the attention of your reader.
Keeping your business plan brief will force you to focus on the most important aspects of the business and only explain those details. For instance, if you’re starting a business cleaning homes, you don’t need to spend 5 pages talking about how exactly you clean mirrors and your exact dusting techniques. They’re just not important to the lender or potential investors, even though it might be very important to operating the business.
In this section also, you have to provide a workable marketing plan. The plan should provide an answer to these key questions: Is there a proven market for your product or service? Who are your competitors and what are their strengths and weaknesses? What is your client profile? What is your key competitive advantage? etc.
Step Ten: Include Supporting Documents
You should bolster your commercial loan proposal by including documents that support, explain and boost the credibility of your plan, including: market studies or other research supporting your conclusions and forecasts; documents to support financial data (e.g. copies of leases, subcontractor estimates, letters of credit); client testimonials; and media reports about your company. The purpose of the supporting documents is to show that your proposal is based on facts.
While there may be no strait-jacketed way of writing a business loan proposal, but following these steps would guarantee that you produce a loan proposal that would be acceptable to lenders. This is because everything that is needed for a loan proposal is provided here in one way or the other.