Businesses need financial resources to grow. To get the financing, you may need to prepare a loan proposal. The business loan type you may need may be different—from a line of credit to accounts receivable financing—they all require a loan proposal. Without a strong proposal, your loan applications will be declined. That’s why you, as a business owner, should understand how to ask for small business funding.
What Should a Business Loan Proposal Contain?
Before applying for a loan, you should decide on a type of loan. There are traditional term loans and business lines of credit, but there are also microloans and equipment financing. No matter the loan type, you will need a loan proposal that discusses why you need the funding and how you will repay the loan.
General Requirements for a Loan Proposal
If you have a current business plan, you already have most of the needed information. If not, schedule some time for collecting the documentation. You will need data that explains the following:
- How much money you need.
- What you are funding with the loan.
- How you will repay the loan.
- What you will do if you cannot repay the loan.
Loan proposals need a clear statement as to why funding is necessary. If you don’t have a clear objective, it won’t be easy to get loan approval. Spend time thinking about these four crucial areas before writing your loan proposal. When you’re ready to begin putting your proposal together, be sure to follow the recommended format for your targeted lender.
Format Requirements of a Loan Proposal
If there is no lender-specific format, following the Small Business Administration (SBA) guidelines is the best approach since many lenders accept SBA loan applications.
- Proposal Summary. Provide a synopsis of the loan proposal in the form of an executive summary or cover letter. It should focus on you and your management team, your business experience, what your business does, and how you plan to use the money to grow your business. It should address the four general requirement areas as briefly as possible.
- Business History. Depending on the type and size of the loan, you may need to provide a more detailed business history. For most loans, the number of years you’ve been in business and any significant changes in financial health during that period should be enough.
- Market Assessment. This section should convince lenders that you understand your market, customers, and industry. The level of detail will depend on the requested amount.
- Management. This section should list the owners and management team for the business, along with any education or experience in the industry or business.
- Amount Requested. The loan amount is more than just a number. It should be supported with data that shows how you arrived at the requested amount. If you’re asking for equipment, include quotes or pricing for each item. If you need money for prototyping, explain how the loan will help accomplish that. This is the section that describes why you need the loan.
- Loan Repayment. Detail the terms of the loan you are requesting. These terms should include the interest rate, length of the loan, and other conditions you would like to receive. Based on your proposed terms, demonstrate how you will meet a repayment schedule. Using sales forecasts and cash flow projections, you will need to discuss how you will repay the debt.
- Loan Default. For most loans, some form of collateral is used as security against default. Collateral is some asset that can be sold to repay the loan should the business be unable to do so. These assets may include equipment, buildings, or investments.
- Financial Statements. The business’s balance sheets and income statements for the last three years (and possibly tax returns) will be needed to demonstrate financial viability. Personal financial statements or tax returns will be required of all owners with at least a 20% interest in the company.
- Equity. Lenders expect that a business owner will invest in their business. That equity can appear as retained earnings on financial statements or as a cash deposit from an owner. The typical benchmark is that debt does not exceed four times the equity in the business.
- Forecasts. You will need to provide sales and cash flow forecasts for at least one year. This section should also include plans to adjust operations should revenue not meet projections.
Depending on the type of loan, other documents may be needed. For example, if you operate a franchise, a copy of the signed agreement may be required. If a specialized business or operating license is required, be sure to have copies available.
What Are the Small Business Loan Requirements?
For small business owners, personal and business financial health can impact small business loan eligibility. You will need to ensure that all parties with more than 20% ownership have their personal financial information available.
Personal Finances
Lenders will look at your personal credit score and credit and payment history as part of their risk assessment. They will look at your debt-to-income ratio to assess your financial health. If you have maxed out your available credit, lenders will be hesitant to grant loan approval because you have limited financial flexibility.
Business Finances
Lenders are focused on a business’s available credit and debt commitments. If a business has little debt, good credit, and a strong cash flow, the risk to the lender is less than a company with high debt, limited cash flow, and poor credit. Having debt is not a concern as long as it is reasonable, given the industry and economic climate.
If your annual revenue has grown over time, lenders are more likely to consider your loan application. However, the growth needs to be at or above your industry average. If revenue has plateaued or is below average, lenders may feel that the risk is too significant and deny the loan application.
How Can You Improve the Chances of Loan Approval?
Loan approval is not automatic. In fact, the majority of small business loan requests are denied. Two ways you can improve your chances of approval are:
- Having a co-signer. A co-signer is someone who agrees to repay the loan should your company default. The co-signer will need to have the financial resources to ensure repayment of the loan.
- Offering collateral. Collateral is required for a secured loan. It may not be required; however, providing collateral as part of the loan proposal can strengthen your chances of receiving loan approval.
Ensuring your personal finances are strong is another way to improve the odds of getting a loan approved. Take the time to look at your credit score and correct any errors before applying for a business loan.
