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Applying for a Small Business Loan
There is one reason main reason a business takes out a loan. It needs the money. When applying for a loan there is a lot of paperwork and information required. A business owner must make the best presentation possible in the loan proposal and application process. Often, there isn't a second chance. Banks and lenders are in the business of making money. They will only lend to businesses that show that they are able to repay. The Small Business Administration says that there are five "C's" of credit that banks consider when they review loan applications: capacity, capital, collateral, conditions and character. An applicant must foremost be able to prove the capacity to repay a loan. The lender considers the business cash flow, repayment timing and the credit history of the applicant to be indicative of the business' ability for repayment. Prospective lenders will want to see how much capital you have personally invested in the business. When a business owner has a significant personal investment it shows the bank that the success of the business is highly important to the owner. Collateral and guarantees show the bank that if a business should fail, they will be able to recover their money. Business and personal assets can both be used as collateral on a business loan. A guarantee is a promise that the loan will be repaid by the guarantor. The bank will look at conditions that affect the repayment of the loan. The economic health of the industry and the strength of the business will be considered. The purpose of the loan will also be considered as a condition that may influence repayment. The character of the business owner shows basically whether he or she can be trusted by the lender. Many factors are at work here, including education, business experience, organizational skills and knowledge of financing. References and employees may also be reviewed. The five "C's" are revealed to a potential lender in the loan proposal. A well written proposal can guarantee the success of a loan. The proposal should always start with a cover letter that offers an executive summary of the business. This includes information about yourself, the business, why you are requesting a loan, what terms you are seeking and how the loan will be repaid. The loan proposal should include a written description of your business. Basically, where you business has come from and where it is going. This includes information on competition, customers and suppliers. Also including should be the resumes of each owner and key management members. All principal owners must also attach financial statements less than 90 days old and the previous year's federal income tax returns. Loan repayment information, existing business statements, projections and proposed business statements should prove how the business intends to repay the loan. Other items that should be included are copies of leases, franchise agreements, purchase agreements, plan specifications, licenses, references, letters of intent, business contracts and partnership agreements. A list of real property and other assets to be held as collateral should also be included. All business must show at least two identifiable sources of repayment. Business cash flow is usually the first and preferred source. The second source is the collateral pledged to secure the loan. A complete proposal educates the lender about you industry and business. Simple planning shows that you are dedicated to the success of your business. By making the best presentation possible, you can easily secure necessary funding. |