WHY ELEMENTS OF A LOAN PROPOSAL ARE IMPORTANT

WHY ELEMENTS OF A LOAN PROPOSAL ARE IMPORTANT

Loan proposals are formal, written documents that businesses must prepare when they approach potential lenders or investors for funding.  A complete loan proposal package should consist of completed loan application forms (if required), and a comprehensive business plan with complete financial statements. Ideally, the loan proposal should present information about the business, its future prospects, and its financing needs in a straight forward manner.  All the pertinent information the lender or investor might need in making a decision should be provided in a logical format.  Loan proposals must be thorough yet concise, convincing yet honest.  The aim is to answer all the questions that a lender or investor is likely to ask without overstating the facts and figures.

Preparing a solid loan proposal can be very time-consuming, but it has proven to be the best way for a business owner to demonstrate his or understanding of the business and its financial demands to potential lenders or investors.  Furthermore, the business plan portion of the loan proposal can serve as a sort of handbook for running the business. It presents criteria against which management strategy and decisions can be continually evaluated.  Overall, a formal loan proposal should illustrate why the business is a good credit risk by placing it within the context of its market and competition, explaining why any peaks and valleys in cash flow, and emphasizing the strengths of the management team.

Elements of a Loan Proposal

Some of the elements that should be included in a good loan proposal are as outlined below:

It should begin with a summary page that provides contact information for the company, the amount of the loan request, the company’s intended purpose for the funds, and the proposed repayment terms.

The next section should feature a description and summary of the business, including a brief history. The description should also include information on the size and potential for growth of the business’s main markets, an analysis of the competition, and notes on any emerging industry trends.  Other useful information might include an explanation of any unique aspects of the business’s product or service, information on local advertising efforts, and a long-term growth plan. 

The next major section of the loan proposal features information on the company’s management team, including brief resumes outlining experiences of key employees.  This section might also include notes on the business’s current staffing level, along with an analysis of future staffing needs.  The names and contact information for accountants and attorneys should be provided.

The next section consists of the loan request itself. This section should provide the potential lender with details  about the amount of funds  needed, how they will be used, what collateral is available to secure the loan, the company’s proposed repayment terms, and evidence of the business’s ability to repay  the loan.

Another section should include supporting financial data, including a current balance sheet and income statements, three years of historical financial statements (for existing businesses), projections of cash flow for the next year, and personal financial statements for the business’s primary owners or investors. Another important loan-related section should supply information on the business’s current sources and uses of credit, including the names and contact information for lenders and trade creditors.

 The final section of the loan proposal can include a variety of miscellaneous information that might help the lender to reach a favorable decision. For example, the business owner could attach business licenses, copies of partnership agreements or articles of incorporation, copies of tax returns, lease information if renting facilities, and information on insurance coverage.

Making the Proposal

 The loan proposal  should be written using a layman’s terms, and illustrated with computer-generated graphics and charts that highlight  key areas of the  of the proposal  and provide a visual  representation of the ideas presented.  Overall, the loan proposal must anticipate any objections the lender or investor might have to providing funds for the business, and then provide the information needed to overcome the objections.

After creating a formal, written loan proposal, the next step is to present the proposal to a potential lender. It is recommended that the business owner take one last look at the loan proposal before taking it to the bank, in order to verify the numbers and be ready to answer any questions with confidence. 

It is important that rather than just dropping the loan proposal off, the business owner meet with the lender to review the loan proposal in detail.  The in-person presentation should focus on just a few key points of the proposal.  It is intended to improve the lender’s understanding of the business and the loan request, so that he or she will be able to defend the proposal before other decision makers. 

At the conclusion of the meeting, the business owner should ask when a decision might be expected. It is also important for the business owner to be available during that time period to answer any follow-up questions.

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