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Article added or updated:
09/05/2011 |
Applying for a Small Business Administration Loan
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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 opportunity.
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Always begin your proposal
with a cover letter or executive summary. Clearly and briefly explain
who you are, your businessbackground, 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 businessis 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
Location
Product or service
Brief history
Proposed Future Operation
Competition
Customers
Suppliers
Management Experience: Resumes of each owner and key management members.
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)
Franchise Agreement
Purchase Agreement
Articles of Incorporation
Plans, Specifications
Copies of Licenses
Letters of Reference
Letters of Intent
Contracts
Partnership Agreement
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 businessto 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 businessand is
an indication of how much you will lose should the businessfail.
Prospective lenders and investors will expect you to contribute your own
assets and to undertake personal financial risk to establish the
businessbefore asking them to commit any funding. If you have a
significant personal investment in the businessyou are more likely to
do everything in your power to make the businesssuccessful.
Collateral or guarantees are additional forms of security you can
provide the lender. If the businesscannot 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 businessand 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
businessand in your industry will be reviewed. The quality of your
references and the background and experience of your employees will also
be considered.
SBA
Web Site
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