How to Prepare a Loan Package
Do you need a loan for your business? First, you’ll have to put up some of your own money. No lender will be willing to lend you all of the money you need. The lender wants to make sure that you have some money at risk too.
You may have formed your business as an LLC (limited liability company) or a corporation as a way to achieve liability protection. Even so, a lender will most likely require a personal guaranty. That means that you’ll have to personally guarantee payment of the loan.
Ok, so what about getting a grant, money that you won’t have to pay back. You should know that there are no government grants to help you start a for-profit business. No matter what you have found on the internet, you won’t be able to get a grant from the U.S. government or any of its agencies such as the SBA. Beware of people who ask for a fee to help you find grants for your business.
What about SBA loans? The SBA does not lend money, it guarantees the loan that you are able to get from a lender. SBA provides a level of security to lenders who loan money to businesses that might not otherwise be able to secure a loan. SBA guaranteed loans are often short-term but could have a maturity greater than ten years. The length of the loan will be tied to the working capital needs being met or to the life of the assets being purchased with loan proceeds. Your credit history will be important when applying for a loan.
A lender will want to know
- Purpose of the loan
- Loan amount you are requesting
- When and how long you will need the funds
- How the loan will be repaid
- What collateral can be used
- Will the business owner provide a personal guaranty
Purpose of the loan
Why do you want money for your business? There are two possibilities:
- Working capital: the day-to-day business needs for the next year or so. These are typically short-term loans.
- Growth capital: to meet the more long-term needs of your business. These loans are used for buying assets such as vehicles or equipment. They have a long-term payback period, usually three to seven years.
You’ll need to be able to show how the money will be used to increase profits sufficiently over the term of the loan so that the loan can be paid off during the agreed upon time frame
It isn’t how much you can borrow, it’s how much you need. Borrow only what you need. Remember, 100% financing is not an option. Never ask to borrow money you don’t need.
This is very important to the lender. Your past and projected financial statements will be examined to see how well your cash flow can satisfy repayments on time and in full.
What collateral can be used? Lenders find comfort in using collateral to secure a loan because the collateral can be sold to payoff the loan if all other means of repayment are exhausted. It’s all about lowering risk to the lender. Consider all your options. Estimate its value. Provide supporting appraisals and documentation to justify its worth..
Examples of collateral:
- Accounts receivable
- The asset being purchased with the loan
- Real estate
Components of the loan package
The loan package should contain enough information so that the lender can justify the loan to a bank’s lending committee. Different lenders require different things as a loan package.
A typical loan package contains:
- Statement of purpose: Sometimes a letter and sometimes the Executive Summary of a business plan. Information about amount, purpose, length of loan, repayment, and available collateral. It also should contain a brief description of the business and include a narrative about the positive affects the loan proceeds will have on the business. It should also include a few paragraphs about how much each owner of the business has invested in the firm.
- Business plan or plan excerpts
- Business description and vision
- Market definition, analysis & sales
- Description of products/services
- Organization and management
- Financial statements to tell a story about the financial capacity and performance of a business.
- Cash flow: Used to monitor incoming and outflowing cash typically on a monthly basis. It is used to determine projected working capital availability and shortages. That is it will tell you and a lender how much cash your business will have on hand. Your package should include a current 12-month projections. All projections should be realistic and supported by backup such as bank statements.
- Income statement: Is a measure of how a business has performed over a specific period of time (monthly, six months or a year). Its calculation is Revenue less Expenses equals Profit or Loss. If yours is a new business your package should include a projected Income Statement projected for twelve months out. If you are an existing business then include Income Statements from the last three years if available.
- Balance sheet: It measures the business value and financial condition as of a specific date. It is a snapshot view of your financial condition. If you are a new business then prepare of Balance Sheet as of your opening date and a projected BS as of one year from your opening date. If yours is an existing business, prepare BS as of the past three years if available.
- Personal financial statements: A simple balance sheet measuring net worth. It helps the lender evaluate your personal financial capacity and the strength of your personal guaranty. Personal assets minus debts equals Net Worth.
Loan packaging tips
- Your loan package should be brief, to the point, and easy to read.
- Emphasize the strengths of your management personnel.
- Present realistic and attractive projections and assumptions that can be backed up with data.
- Weave in the theme of how the lender will get their money back.
- Proofread your package materials. Have someone else go over your materials for spelling, grammar and style.
- Learn from your mistakes. If you get rejected by one lender, find out why, fix the problem and do a better job with the next lender.
Evaluating your request
After you submit your loan request to a lender, how will it be evaluated? Your lender will apply the “3Cs” of credit along with other factors in making lending decisions. Remember that banks make their money by lending money and receiving interest payments and loan principal. Bank manager’s careers are built on making profitable loans for the bank. Profitable loans are loans that are repaid. You must convince the lending officer that you and your business are a good risk.
The 3 Cs are
• Character: a check on your financial status and personal credit history including your previous loan payment record. The theory is that if you have a history of paying your debts on time and in full, that you will most likely pay this loan as agreed. Also considered is your experience in the kind of business that you’re trying to finance, including level of responsibility, education, and business management training.
• Capacity: having sufficient cash flow to pay off your loan. This highlights the importance of preparing a cash flow projection before present your loan proposal to a lender. Having a cash flow projection shows your awareness of the cash coming into your business and where it is spent. It shows a lender that you are financially aware and better prepared to avoid a cash shortage that would jeopardize making timely loan payments.
• Collateral: a secondary source of payment should the business not prove profitable enough to pay its debts. The presence of collateral lowers the risk of default and remember that the lender is very sensitive about lowering its risk of loss on the loan.
Step 1: Identify potential or existing financial needs for your business.
Step2: Test the waters by talking with a local lender about types of loans available to small businesses.
Step 3: Talk with a mentor, business coach or SBA representative about all available small business loan products.
Step 4: Prepare a draft loan package and review it with a lender, mentor or business coach.
SBA District offices http://www.sba.gov/localresources/index.html
Small Business Development Centers http://www.sba.gov/localresources/index.html
SCORE Small business counselors http://www.score.org/index.html
Association of Women’s Business Centers http://www.awbc.biz/default.asp
Categories: For Business Owners