Developing a Loan Proposal

 Arkansas Small Business Development Center

Do's and Dont's of Writing a Loan Proposal

A loan proposal is essentially an abbreviated version of a business plan. Loan proposals are typically used by existing businesses to request financing. Loan proposals are also used by those who are seeking financing to purchase a business. The loan proposal is not as lengthy as a business plan; however, developing a loan proposal still requires time and effort to convey the information that a lender needs in order to make a loan decision. Included below are suggestions for do's and don'ts of writing a loan proposal.

• Do use the ASBDC "Developing a Loan Proposal: Suggested Contents" outline. This outline provides a list of information that should be included in a loan proposal. It is important to include all of this information in your proposal.

Developing a Loan Proposal: Suggested Contents

• Do keep in mind that a lender must have information about your business in order to make a decision on a small business loan. A lender cannot make a decision on your loan request without adequate written information/documentation on the business. A loan proposal is a tool that should be used to communicate critical aspects of your business to a potential lender.

• Do make sure the information contained in your loan proposal is up to date. Make sure the loan proposal contains up to date information about your business including any changes in business operations or future plans for the business. Current financial statements should also be included.

• Do make sure that your loan proposal tells the "story" of your business. Your loan proposal document should be a stand-alone document, meaning that it should speak for itself without requiring additional explanation. Keep in mind that there may be people involved in making your loan decision who will never meet you.

• Do make sure your loan proposal presents a professional image. While a loan proposal typically contains less information than a full business plan, the loan proposal should still be presented in a professional manner.

• Do keep the audience in mind when developing your loan proposal. Typically, lenders see many proposals throughout the course of the year and work with a variety of business types. Most likely, a lender will not be an expert in your industry; therefore, you should explain any relevant technical/operational terms in detail.

• Do make sure that projected sales and expenses are reasonable. When constructing your financial projections, be conservative in estimating your revenues. Lenders may view over-inflated sales figures as unrealistic and unattainable. When projecting expenses, consider all possible costs and avoid underestimating.

• Do explain how the proposal relates to the financial projections. You should always include a narrative explaining the assumptions you used to arrive at the dollar value of sales, expenses, etc. You must demonstrate that your numbers are reasonable.

• Do answer key questions such as who, what, where, when, how, why and how much? A quality loan proposal contains answers to pointed questions concerning who, what, where, when, how, why and how much. Make sure this information is clear and concise.

• Don't just gather your tax returns and/or financial records to "show the lender." The loan proposal does not need to be extremely complex; however, some form of written narrative about your existing business, future plans, etc. should accompany the financial statements. Do not make the lender "guess" how your business operates.

• Don't assume that you can obtain a small business loan solely based on a conversation between you and your lender. In order to make a decision on a small business loan, a lender typically requires much more information than can be conveyed in a conversation.

• Don't assume the process of obtaining a business loan is the same as obtaining a personal loan. The process for obtaining a small business loan is typically more complex than obtaining a personal loan, auto loan, or home loan. More detailed information is required, and it is more challenging to obtain approval.

• Don't assume that you'll have an answer to your loan request in a couple of days. Obtaining financing for a small business can be a lengthy process. Don't wait until the last minute to try to obtain a small business loan. It is important to plan for anticipated financing needs.

• Don't handwrite your loan proposal. A handwritten proposal does not convey a professional tone. Provide a typewritten, well organized proposal to your lender.

• Don't keep relevant information from the lender. The lender has access to your credit history; therefore, do not try to hide financial information. It is important to be honest and open with your lender about all aspects of your business and your personal financial situation.

• Don't assume that your lender has the same level of optimism as you do about your business. Lenders are risk averse, so while it may be clear to you that your business will succeed, you must demonstrate your plan for success to your lender in your loan proposal.

• Don't assume that you can pull together a loan proposal in a couple of hours. It will take time for you to gather all of the documents and information you need for your loan proposal. In addition, you will have to develop portions of your loan proposal including the written explanation of your business history and future plans, marketing strategies, management and personnel requirements, and prepare financial projections for the business. This takes time!

Arkansas Small Business Development Center
University of Arkansas at Little Rock
2801 S. University / Little Rock, Arkansas 72204
Phone: 501.683.7700 Fax: 501.683.7720

http://asbdc.ualr.edu/bizfacts/1004.asp 

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