Financing is a key for new businesses, but convincing a bank or other lender to provide a loan isn’t always quick or easy. Preparation of a strong financial management package can speed up the loan process and even make the difference between obtaining financing and not. A financial management package will include a letter or summary describing you, your business and a summary of the purpose of the loan. It also includes a detailed description of the loan, how you will use the money and how you plan to pay it back. It will include budget projections and other business financial information as well as any legal documents associated with your business. It will usually require summaries of your personal financial situation well.
Letter or Summary
The first component is a two-to-three page cover letter or executive summary that clearly describes you, the nature of your business, the amount you seek to borrow, the purpose and the means to repay the loan. Include enough information so that the lender can understand your request. Don’t assume that the lender knows your industry; describe it clearly. Detail your previous experience in your industry, including any previous management experience you have.
In the next section, provide details about the loan. Lenders typically want to lend money either to advance your working capital or to provide growth capital. An example given by the SBA is that a farmer would use a working capital loan to buy seeds and fertilizer and would repay the loan at harvest time. Growth capital would be a loan to allow the farmer to buy the adjoining property or for a logistics firm to buy a forklift for use in the warehouse. These loans are repaid over a longer period of time, perhaps seven years. Explain the type of loan (working capital or growth financing) and its specific purpose. If you are using the loan to buy a forklift, for example, explain how the forklift will be cost effective by lowering labor costs. Specify the amount needed and explain why a loan is the best way to obtain this money. Detail how much of your own equity (cash and sweat) your are prepared to contribute. Provide information about how and over what time period you expect to repay the loan. State what collateral will be available to secure the loan; for example, the forklift itself might be used as collateral for a loan to purchase it.
The next section of your loan package is the business information. Legal documents, such as leases, franchise agreements, contracts with clients or vendors, articles of organization or incorporation are included in this section. Also include in this section a copy of your business plan, or if you don’t have one, a detailed summary of your business’s history and purpose. That summary should include, at minimum, a business description and vision; market definition, analysis and sales; products and services; and organization and management. Include financial projections such as sales, cash flow and break-even analysis (or the point at which all revenue equals all costs.) If your business has operational history, include profit and loss statements, income statements and tax returns.
Personal Financial Information
Most new small business owners will be required to personally guarantee their loans. Even owners of more established businesses generally will be required to do so in today’s economic climate, regardless of business type. Thus, your personal credit score and financial history are important. Typically you will need to include a personal financial statement for each owner, such as a statement of assets, such as home or car, and liabilities, such as a mortgage or other debts. Personal tax returns from the past three years also will likely be required.