There are many resources available on the web and elsewhere about how to put together a loan proposal. I’m not going to spend time re-hashing all of the details, other than to briefly bullet out the major components at the bottom of this post.
My goal with this post is to emphasize some critical pieces of a loan proposal and some of the red flags to avoid when crafting your financing request. These items are based on my actual experiences borrowing (and fortunately, repaying) several hundred million dollars for equipment financing, business acquisitions and real estate acquisition and development.
Following are four recommendations for any type of loan request:
- Be sure you ask for enough. This sounds ridiculously obvious, but the last thing you want to do is to have to “go back to the well” mid-project. If this happens, your lender will typically have to take the request back into their loan committee. Suddenly, your new loan is in the spotlight at the bank. Trust me, that’s not where you want to be. Be sure that your budgets are ample and include a contingency for unforeseen events.
- Be specific about how you are going to use the loan proceeds. Include a detailed schedule in your request that shows exactly how you are going to use the lender’s money. Avoid vague categories such as “other,” “miscellaneous,” “general overhead” and the like. These are potential red flags that could indicate that some of the loan proceeds are going to be used for general operating expenses. Lenders like to fund investments and growth initiatives, not the “light bill.”
- Tell the lender how your are going to repay the loan and when. Just as you need to tell the lender how you are going to use the loan proceeds, you also need to explain how you are going to repay it. If the loan is for new a new facility or new capital equipment, presumably this will contribute to new business generation or operating efficiencies that translate into “cash flow available for debt service.” Include financial projections that demonstrate that the company can meet debt service obligations.
- Think about how your lender will secure the loan. That’s right, we’re talking about collateral. Your lender WILL ask for everything: a security interest in the item(s) financed, an assignment of all of your other assets and a personal guaranty to top it off. Think about what types of collateral are reasonable to allow you to operate your business without undue restriction, and be prepared to negotiate with your lender. Personal guaranties are sticky, particularly if your business has multiple owners. That’s a topic for another day.
Hopefully, you’ll find the above items helpful in crafting a comprehensive loan request that will demonstrate your professional expertise and make your lender’s job easier.
To wrap up, I promised to quickly bullet out the contents of a typical loan request, so here goes:
- Request letter – a narrative explaining the loan request, use of funds, why it’s necessary for your business, etc.
- Terms sheet – this is optional, but I find it helpful to bullet out all requested loan terms in a single sheet
- Legal descriptions or other documents describing the collateral.
- For major loan requests, include your business or strategic plan in the request to demonstrate how the asset(s) being financed are an integral part of your plan.
- Pro forma cash flow projection that demonstrates your ability to meet routine debt service obligations and ultimately repay the loan.
Question: What other items do you include as “must haves” in your financing requests?
Question, is payroll something to be considered within the request? I study business pro per se, and craft my own businesses through diligent studying, resourcing and keeping an open mind to other peoples response. I can appreciate the way you outlined the necessities in the contents herewith. Thank you for the help.
Most business loan requests involve new equipment, facility expansions and the like (the exception is a revolving credit line request). With most business loans, you include all costs of acquisition of the new equipment/facility and sometimes an interest reserve. It is not customary to include routine payroll expenses in this type of loan request. With a revolving credit facility, a borrower has the ability to finance a variety of expenses – payroll, rent, utilities, inventory purchases and other expenditures.