In their book Start Your Own Business, the staff of Entrepreneur Media Inc. guides you through the critical steps to starting your business, then supports you in surviving the first three years as a business owner. In this edited excerpt, the authors describe what materials you need to include in a loan application to a bank.
When you're 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 ads. When you put togetherThingsthe right combination of facts and figures, your application will sell your lender on the short- and long-term profit potential of lending money to your business. To do that, the application must convince your lender that you'll pay back the loan as promised and that your managerial ability will result in a profit-making partnership.
Banks are in the money-lending business. To lend money, they need evidence of security and stability. It’s that simple.
How can you provide this evidence when your business hasn’t even gotten off the ground? Begin by making sure your loan application is both realistic and optimistic. If you predict an increase in sales of between 8 and 12 percent, base your income projections on an increase of 10 percent, and then specify what you intend to do to ensure the additional sales.
Also make sure your application is complete. When a piece of an application is missing, bankers instantly suspect that either something is being hidden or the applicant doesn’t know their business well enough to pull the information together.
There are 12 separate items that should be included in every loan application. The importance of each one varies with the size of your business, your industry, and the amount you're requesting. Many of these items are part of your business plan; a few of them will have to be added. Here’s a look at each section:
1. Cover sheet. This is the title page to 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 telephone number.
2. Cover letter. The cover letter is a personal business letter to your banker requesting consideration of your application for a line of credit or an installment loan. The second paragraph should describe your business: “Our company is a [sole proprietorship, partnership, or corporation] in manufacturing, distributing, and retailing X type of goods.” The third paragraph is best kept to just one or two sentences that “sell” your application 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 the documents are included.
4. Amount and use of the loan. This page documents how much you want to borrow and how you'll use the loan. If you're buying a new piece of equipment, for instance, it should show the contract price, add the cost of freight and installation, deduct the amount you'll be contributing, and show the balance to be borrowed.
5. History and description of your business. This is often the most difficult to write. The key is to stay with 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. Tell why you believe the business is going to succeed. Conclude with a paragraph on your future plans.
6. Management team. Bankers know that it’s people who make things happen. Your management team might consist of every employee, if they oversee an important part of your operation, or it might be just you and one key person. It also includes any outside consultants you plan to use regularly, such as your accountant or banker. In one or two pages, list each person’s name and responsibilities. Where appropriate, describe the background that makes this person the right choice for that job.
7. Market information. You should begin these pages with a complete description of your product line or service, and the market it's directed toward. Next, describe how you've targeted your market niche and how successful you've been. Finally, detail your future plans to add new products or services.
8. Financial history. Most bankers want to see balance sheets and profit and loss statements. As a startup, you will need to use projections. Bankers will compare these to norms in your industry.
9. Financial projections. This set of three documents—a projected income statement, balance sheet, and cash-flow statement—should show how the business, with the use of the loan, will generate sufficient profits to pay off the loan. Your accountant can help you prepare these documents.
10. Collateral. Listing your available collateral—cash reserves, stocks and bonds, equipment, home equity, inventory, and receivables—demonstrates your understanding that your banker will normally look for a backup repayment source. Each piece of collateral listed should be described with its cost and current fair market value. You might need to provide documentation of value—so be prepared to get appraisals or get your paperwork in order.
11. Personal financial statements. As a startup, you'll need to add your personal guarantee to any loan the bank makes. The banker will want to see your tax return and balance sheets showing personal net worth. Most banks have preprinted forms that make pulling these figures together relatively easy.
12. Additional documents. In this section, you can include whatever documents you feel will enhance your loan package. This might include a copy of the sales contract on a new piece of equipment, a lease and photograph of a new location, blueprints, or legal documents. If you're introducing a new product or service, include a product brochure and additional market research information. This section can help a new business overcome the lack of a track record. While glowing letters won’t make a banker overlook weak finances, an assurance from your largest customer that your services are valued can help your banker see your full potential.