12 things your business loan application should include
In their book Start your own business, the staff at Entrepreneur Media Inc. guide you through the critical stages of starting your business, then help you survive the first three years as a business owner. In this edited excerpt, the authors outline the items you should include in a loan application from a bank.
When applying for a loan, it’s important to know what you’ll need to provide and what lenders are looking for. Think of your loan application as a sales tool, just like your brochures or advertisements. When you put things together the right combination of facts and figures, your application will sell your lender on the short and long term profit potential of lending your business money. To do this, the application must convince your lender that you will repay the loan as promised and that your management ability will result in a for-profit partnership.
Banks are in the business of lending money. To lend money, they need evidence of security and stability. It’s so simple.
How can you provide this proof when your business hasn’t even started? Start by making sure your loan application is both realistic and optimistic. If you expect an 8-12% increase in sales, base your revenue projections on a 10% increase, then outline what you intend to do to secure the additional sales.
Also make sure your application is complete. When an element of an application is missing, bankers instantly suspect that something is hidden or that the applicant does not know their business well enough to gather the information.
There are 12 separate items that must be included in every loan application. The importance of each varies depending on the size of your business, your industry and the amount you are requesting. Many of these elements are part of your business plan; some will have to be added. Here is an overview of each section:
1. Cover sheet. This is the title page of your “book”. All it needs to say is “Loan application submitted by John Smith, Sunday’s Ice Cream Parlor, to Big Bucks Bank, Main Street, Anytown.” It should also include the date and your business phone number.
2. Cover letter. The cover letter is a personal business letter addressed to your banker requesting consideration of your line of credit or installment loan application. The second paragraph should describe your business: “Our business is a [sole proprietorship, partnership, or corporation] in the manufacture, distribution and retail of X types of goods. It’s best to limit the third paragraph to one or two sentences that “sell” your app by indicating what your future plans are for your business.
3. Table of Contents. This page makes it easy for your banker to see that all documents are included.
4. Amount and use of the loan. This page documents the amount you wish to borrow and how you will use the loan. If you’re buying new equipment, for example, it should show the contract price, add the cost of transportation and installation, deduct the amount you’ll contribute, and show the balance to be borrowed.
5. History and description of your company. This is often the most difficult to write. The key is to stick to the facts and assume the reader knows nothing about your business. Describe, more fully than in the cover letter, the legal form of your business and its location. State why you think the business will succeed. Conclude with a paragraph about your future plans.
6. Management team. Bankers know that people make things happen. Your management team may consist of all employees, if they oversee a significant portion of your business, or it may consist of just you and one key person. This also includes any outside consultants you plan to use regularly, such as your accountant or banker. In one or two pages, list the name and responsibilities of each person. If applicable, describe the background that makes this person the right choice for this job.
7. Market information. You should start these pages with a full description of your product line or service, and the market it serves. Next, describe how you targeted your market niche and how successful you were. Finally, detail your future plans for adding new products or services.
8. Financial history. Most bankers want to see balance sheets and profit and loss accounts. As a startup, you will need to use projections. Bankers will compare them to your industry standards.
9. Financial projections. This set of three documents – a projected income statement, a balance sheet and a cash flow statement – must show how the company, with the use of the loan, will generate sufficient profits to repay the loan. Your accountant can help you prepare these documents.
ten. Collateral. Listing your available collateral (cash reserves, stocks and bonds, equipment, home equity, inventory and receivables) shows that you understand that your banker will normally seek a backup source of repayment. Each warranty item listed should be described with its cost and current fair market value. You may need to provide valuable documents, so be prepared to get appraisals or get your paperwork in order.
11. Personal Financial Statements. As a startup, you will need to add your personal guarantee to any bank loan. The banker will want to see your tax return and balance sheets showing personal net worth. Most banks have pre-printed forms that make gathering these numbers relatively easy.
12. Additional documents. In this section, you can include any documents that you think will improve your loan record. This may include a copy of the sales contract for new equipment, a lease and photograph of a new location, plans or legal documents. If you’re launching a new product or service, include a product brochure and additional market research information. This section can help a new business overcome a lack of track record. While glowing letters won’t make a banker forget about fragile finances, an assurance from your biggest client that your services are appreciated can help your banker see your full potential.