Loan proposals are formal, written documents that small 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 small business, its future prospects, and its financing needs in a straightforward 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 small business owner to demonstrate his or her understanding of the business and its financial demands to potential lenders and 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's strategy and decisions can be continually evaluated. Overall, a formal loan proposal should illustrate why the small business is a good credit risk by placing it within the context of its market and competition, explaining any peaks and valleys in cash flow, and emphasizing the strengths of the management team.
ELEMENTS OF A LOAN PROPOSAL
The Small Business Administration publication Handbook for Small Business outlines some of the elements that should be included in a good loan proposal. 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 the experience 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 also 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 small business's ability to repay the loan.
Another section should include supporting financial data, including a current balance sheet and income statement, 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 small business owner could attach business licenses, copies of the partnership agreement or articles of incorporation, copies of tax returns, lease information if renting facilities, and information on insurance coverage.
MAKING THE PROPOSAL
In his book Doing Business with Banks, Gibson Heath recommended that the loan proposal be written using layman's terms, and illustrated with computer generated graphics and charts that highlight key areas 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 small business, and then provide the information needed to overcome the objections.
In an article for Inc., Bruce G. Posner solicited comments from bankers regarding the most glaring weaknesses they saw in small business loan proposals. They all expressed a desire to see evidence that the business owner had thought the loan proposal all the way through. "Business owners come in with these beautiful three-ring binders. The numbers are in nice, straight columns, but a lot of these people haven't though about the assumptions they've made and what it will take to do what they say they'll do," said Jeffrey C. Gardner of U.S. Bancorp. "We need to know where the numbers come from. The sad part is that many people don't know what the projections are about because their accountant made all the assumptions."
Dev Strischek of Barnett Bank of Palm Beach County echoed these comments, noting that "The biggest weakness I see is a lack of specificity and a lack of preparation. A lot of people don't really know what they need the money for or how much they need.…We like to see a cash-flow analysis—how much they plan to sell, how much they spend on overhead, how much for inventory, and what's available for debt service. It's easier to do business with people who've thought things through."
After creating a formal, written loan proposal, the next step is to present the proposal to a potential lender. Heath recommended that the small 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 small business owner meet with the lender to review the loan proposal in detail. The inperson 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 small business owner should ask when a decision might be expected. It is also important for the small business owner to be available during that time period to answer any follow-up questions.