How to Prepare a Loan Package
Finding financing to start and expand a company is an age old problem, and most entrepreneurs find it to be one of the greatest struggles they face.
While the process can be time consuming, frustrating, and intimidating, if you are informed and well prepared, your chances of securing the needed capital are greatly increased.
In putting together a loan package, ask yourself the following basic questions. The answers to them and the information provided to back them up are essential to the lending decision and its speed.
1. What is the specific purpose of the loan?
Your lender or investor will review your financial requirements among three types of capital acquisition:
Working Capital: Used to meet fluctuating needs that will be repaid during the company’s next full operating cycle, generally one year.
Growth Capital: Used to meet needs that will be repaid with profits over a several year period (usually not more than seven years). If seeking growth capital, you will be expected to show how the money will be used to increase profits sufficiently to repay the loan in the agreed upon time frame.
Equity Capital: Used to meet permanent needs. Equity capital must be raised from investors who will take a risk in return for some combination of dividend returns, capital gains, or a specific share of the business
2. What amount of financing will support my needs?
Do not ask, how much can I borrow? Have enough existing capital so that, augmented by the loan, the business can operate on a sound financial basis. For new businesses, this includes sufficient resources to withstand startup expenses and the initial operating phase, during which losses are likely to occur. Be able to inject between one third and one half of the total capital required. If you plan to borrow equity from friends or relatives, determine what the repayment terms will be.
3. While the majority of these loans carry terms of three to seven years, some may extend over longer periods. For financial planning purposes, the entrepreneur should keep in mind that longer loan periods incur larger overall interest costs.
4. How will I generate sufficient cash flow to repay the loan?
Consider the situation from the lender’s point of view: if you were asked to lend someone money, you’d want assurance of being paid back in full, and in a timely manner.
5. What collateral can be utilized (if applicable)?
Estimate its value, and be ready to provide supporting appraisals.
6. Will the owners provide personal guarantees?
Having a comprehensive and well thought out business plan is essential in obtaining financing. In fact, without one, even stepping into the bank is pointless. To lenders or potential investors, a plan not only provides information and reveals your evaluation of your venture’s feasibility, but also reflects your management abilities. An analytical, objective business plan convinces lenders you are cautious, conservative, and capable. One that is poorly researched, makes unsupported assumptions, or draws unfounded conclusions shows you are inexperienced and in their eyes reckless. Lenders receive so many proposals that they cannot afford to spend much time evaluating each business plan. That means your plan has only a few minutes to make a good impression, and must therefore speak for itself as a sales tool. Detail their experience and the management and decision making structure. Also include an organizational chart and discuss other key personnel and their responsibilities.
Market Analysis/Marketing Strategy
You should be able to estimate how many customers you will have and how near they are to your location, as well as their age, family structure, lifestyle, disposable income, and purchasing habits. Explain why your product/service is desirable to them, the scope of your firm’s marketing and selling activities (including pricing policy), and what share of the market you will realistically be able to capture based on the industry analysis that follows.