Preparing for a Loan

When applying for a business loan, you need to convince lenders that you a good risk. As with any business, the lender wants to make sure they make money- not lose it. Your understanding and performance in the application process can make all the difference. There are several things you can do to increase your chances of getting the best loan terms available to you.

Preparing For The Application

As you prepare, there some key factors that you need to know before you fill out an application or write a proposal and business plan.

• What is the purpose of loan? While this step may seem simple, a critical error can be made if you don't have a clear idea of your need. Not only does this information need to be in the loan proposal, but lenders are also reluctant to finance an unclear vision. Think about all aspects of the project and write them down.
• How much money is needed? Another critical error can be made if you underestimate the amount. Lenders will not finance a loan if they feel you have asked for too low of an amount. Remember they want to make sure they are making money on the loan. In their experience, business that do not ask for enough funds usually end up defaulting on the loan.
• Know What Type of loan you need. The specific type of loan you need can have an impact on the interest and specifics of the loan.
  • Short term loans- These loans are for one year or less. They are usually given to finance start ups.
  • Intermediate loans- This loan has a term of one-three years. These loans help start up and growing businesses operate.
  • Long term loans- These loans are for three to seven years and are usually given through installments. Established businesses use these loans to expand and fund operations.

A loan that is over three years must be for a specific asset, and that asset is usually held as the collateral for the loan.

• Know what type of repayment schedule fits your needs. This information will be needed when you write your proposal and business plan. Will you make a balloon payment? Does a fixed schedule work better? Ask different lender about their payment options and choose one that suits your needs.
• What can you present as collateral? A lender will want to know what you can present as collateral to guarantee the loan. If you were to default, the collateral will help the bank recoup their losses. Be careful, business owners have lost their homes because they were used as collateral. Make sure what you use is not a vital asset. Collateral can be anything from property or equipment to savings accounts and insurance policies.

Creating Your Proposal

To go along with your application, you will need to develop a well written proposal. Know your proposal backwards and forwards and practice your presentation. A poorly presented proposal can be a deal breaker. A well-developed proposal should include the following.

• Business name and address. The principal's social security number(s) should also be included.
• Purpose of the loan. Write a detailed description of the need.
• Amount required. Remember to be realistic- not too much and not too little.
• Business description. Describe your business and your customers. Highlight accomplishments.
• Ownership structure. Describe the ownership structure in detail.
• Management profile. This section is a biographical sketch. It should outline management's business experience and accomplishments. Your experience in the business is very important. Lenders want to know that you can succeed and repay the loan.

Developing A Business Plan

In addition to loan proposal, a lender will want to see your business plan. The information in the plan will aid in the decision making process. Your financial document and statements will be included in the plan, which is what most lenders are interested in seeing. You will also need to present a solid business plan. The business plan should include:

• Market information- Describe your products or services. Make sure you tell what makes your company standout. Present a competitive analysis that shows you have researched the market. A customer profile is also necessary. Completing this section will show lenders the amount of dedication you have in succeeding.
• Financial info- Include balance and income statements for the past three years. This information will help the lender see your financial stability and health. If you are a new business use projected figures. The most important document is the cash flow statement. Make sure that it is included. List all collateral/assets that they company has. Personal financial statements may also be included.
• Business goals- Describe how you market and financial analysis will help you reach your business goals. A lender wants to know where you see yourself going and what type of profits you project. Remember the lender is most concerned with repayment, but they are also looking for long term relationships. A lender wants to see realistic goals and assumptions.

Other Factors to Consider

Even if you have less than stellar financial information, a loan can still be possible. There are a few other factors that lenders use to help determine whether or not to finance your request.

The most important is your dedication and enthusiasm for the project. They want to see that you are investing your own money into the project that you want to fund. A lender will not usually fund 100% of the cost. When you put your own money into it, that investment shows dedication. If that dedication shows through in your proposal, you might be able to convince a lender to take the risk.

In addition to credit worthiness, letters of recommendation carry a lot of weight. Have past creditors write a reference letter recommending you as a candidate. Remember lenders want to see that can repay the loan. The recommendations will help the lender see that you are worth the risk.