Commercial Loan

The U.S. Government works together with lending institutions such as intermediaries and banks to provide loans and venture capital financing to businesses that cannot gain financing from conventional lending sources. These commercial loans can be utilized for most business purposes. Examples include:

• business start-up
• business expansion
• purchase of equipment
• working capital
• inventory
• acquisition of real estate

The Small Business Association is the organization that administers these loans and can guarantee up to $750,000 of a private-sector loan. The applicant and the lender negotiate interest rates.

Applications for commercial loans require written loan proposals. The proposal should commence with a cover letter or executive summary covering the following topics:

• Who are you?
• What is your business background?
• What is the nature of your business?
• What is the purpose of your loan request?
• What is the amount of your loan request?
• What are your requested terms of repayment?
• How will the loan funds benefit your business?
• How will you repay the loan?

Steer clear of intricate, elaborate language this early on in the proposal process. For the beginning, remain direct. Get the basic information out there in simple terms. If you get too complicated in your summary, no one will have any energy left to read the remainder of your application.

Now, write your proposal. Many different proposal formats are possible; consult your commercial lender about which format will best help you meet your goal. Then, get down to it and write!

While writing your proposal, stick to these tips:

• Discuss industry-specific information, such as current trends. Commercial lenders handle loans for huge variety of situations. Do not assume they know the ins and outs of your industry, or anything about it at all. Educate the lenders as to how your business works.

• Provide a written description of your business. Be sure to include the following details:

• Type of organization
• Date of information
• Location
• Product or service
• Brief history
• Proposed Future Operation
• Competition
• Customers
• Suppliers

• Keep the competition in mind. Other businesses will compete for the same loan you want, so really illuminate what is special about your business.

Management Experience:

Include resumes of all owners and top level management members.

Personal Financial Statements:

The SBA wants to see the submissions of financial statements for all principal owners and guarantors. Principal owners are those individuals who own a minimum of 20% of the business. Financial statements should be from within the past 90 days, or sooner. In addition, include a copy of last year’s federal income tax return with the financial statement. Ensure that you are prepared to discuss trends in your financial statements. Really know the “story” behind any sudden drops—or sudden gains. An option is to explain such trends in an introductory paragraph before your financial statements.

Loan Repayment:

Include a short written explanation of how your business intends to repay the loan. Include repayment sources and time requirements. Also include cash-flow schedules, budgets, and other relevant information to support your claim. Ultimately, loan repayment will be negotiated between you and the lender; however, prospective lenders will still want proof that you are thinking in terms of repayment.

Projections:

Include a projection of future operations for a minimum of one year or until positive cash flow can be demonstrated. Include earnings, expenses, and reasoning for your projections. Write up these projections in profit and loss format. If your estimates differ from trend or industry standards, make sure you can explain why. Furthermore, you should be able to justify your projections. Anticipate questions from the prospective lender about worst-case scenarios; for example, what if some of your projections fail to come true?

Collateral:

There aren’t many financial institutions out there that will provide loans that are not collateral-based, so you must provide a list of assets to be held as collateral. These assets include real property. All loans should have a minimum of two identifiable sources of repayment. Source One is usually cash flow generated from business profit. Source Two is generally collateral guaranteed to secure the loan.

For Existing Businesses Only:

Provide financial statements for the last three years or more, plus a current dated statement from within the past 90 days. Include:

• balance sheets
• profit and loss statements
• reconciliation of net worth
• information about accounts payable and accounts receivables
• a schedule of term debt

If you’re including other balance sheets, be sure to explain what they are, and how they are significant.

For Proposed Businesses Only:

Provide a pro-forma balance sheet detailing the sources and uses of:

• equity
• borrowed funds

If Applicable, Also Include the Following:

• Lease (copies of proposal)
• Franchise Agreement
• Purchase Agreement
• Articles of Incorporation
• Plans, Specifications
• Copies of Licenses
• Letters of Reference
• Letters of Intent
• Contracts
• Partnership Agreement
• Literature detailing your products or services.
• Letters from suppliers, satisfied customers and other business references.