Applying for a Loan
The process of applying for a business loan is a stringent one
as compared to the standard procedures in obtaining a home
mortgage loan or a personal loan. This is probably due to the
fact that business loans contain a greater risk element as
compared to other loans. Therefore, lenders need to exercise
greater caution and emphasis when evaluating business loan
applications in order to minimize their risk exposure.
With that, lenders evaluate their applicants based on the
information that are provided as well as their judgment of the
viability and profitability of the business being financed.
Thus, business loan applicants will be required to submit a loan
proposal along with their applications with the purpose of
creating a positive impression upon the lender.
The first element of a loan proposal is an executive summary,
providing short descriptions of the type of business and the
industry, the purpose and usage of the loan, the proposed
repayment conditions as well as the intended loan period. After
that, the company information is provided, enriching the reader
with the nature of the business, the location of the business,
company history, the products or services provided, key
differentiation factors of the company or the product, the
general growth of the industry, competitive information, growth
potential and target customers.
It would help if you could include your company marketing
strategy, detailed product information, historical information
as well as projected growth plans for the company. Apart from
that, if you plan to incorporate product or service extensions
in the future, you should provide these descriptions within your
loan proposal. If possible, geographical expansion plans will
help in the proposal.
The next area that needs to be showcased in the proposal would
be the credentials and experience of each member of the
management team. Impressive credentials will provide assurance
to the lender that the company is managed by individuals who are
responsible and capable. This is important as having the wrong
people managing the company could be detrimental for the
business.
In any loan application, historical records are essential to be
used in evaluating the performance of a company. As new
companies do not yet have these records, the financial records
of the owners will be used as the basis of evaluation. Income
tax returns forms are also required by lenders. All of these
records provided should be the latest copies less than 90 days
old, with the exception of the income tax returns form.
If the loan is applied for an existing company in active
operations, company financial statements, including profit and
loss accounts, balance sheets and the net worth reconciliation
record should be included in the loan proposal. Again, all of
this information should also be the latest and less than 90 days
old. Additionally, a listing of accounts receivables and other
short term and long term debt should be attached.
On the other hand, if the loan application is submitted for a
new business, a pro-forma balance sheet and profit and loss
account should be provided. Apart from that, a cash flow
projection for the upcoming year is drafted to indicate the
possibility of recovering the debt. This also means that
projected revenue, profits, costs incurred and expenditure
should be listed out with definite explanations provided as well
as a list of assumptions.
If you possess assets that you wish to use as collateral for
your loan, details for this should be provided to the lender as
well. It is often common for lenders to request for dual sources
of repayment in the event that one source is defaulted. This
means that if the business owner defaults on his repayments, the
collateral can be sold in order to recover debt.
Finally, other documents normally required for a loan
application would be items like the article of incorporation,
lease agreements, partnership agreements, license, references,
etc. As the list of required documentation, information and
attachments differs between lenders, it is best to check with
the individual lender on their specific information and
documents required to be attached with the loan proposal.