How to Prepare a Loan Application

In preparing a loan application, you will not only need details about the loan you are requesting, but you will also need a business plan. The plan should be detailed and well-organized so that you convey to potential lenders that you have the managerial capability and technical understanding to run a successful business.

Put the final version in a binder and make several copies for each of your potential lenders.
In the business plan, make sure to include the following information:

  1. Title page – lists the name of the business, the owner(s), the address, and telephone and fax numbers.
  2. Executive summary – summarizes and explains the organization of the business plan. Write this after you have finished the rest of the plan.
  3. Business description – tells the nature of the business, describes the product and its production process, and identifies its customers and competition. It should also explain the makeup of the ownership of the company.
  4. Personal profile – outlines the background and experience of each of the principals in a resume.
  5. Collateral – includes both personal and business resources. These are items that can be converted into cash, like accounts receivable, securities, inventories, fixtures, machinery, or real estate.
  6. Financial statements both personal and for the business.
    1. The business financial statement should contain a balance sheet for the last three years and a profit-and-loss statement. The balance sheet will indicate assets and liabilities, while the profit-and-loss statement will show revenues and expenses for your company.
    2. The personal financial statement should list your assets and your liabilities.

Check out the New York Fed’s website which has sample accounting statements. A complete loan application will include the following:

  1. Business Plan – see above.
  2. Proposal – this is the most important part of your application.
    1. State the type of loan you are requesting and ask for a specific amount of money.
    2. Create a narrative that explains how the loan will help your business.
    3. Include how you plan to repay the loan. Also make a backup plan in case your initial source of repayment fails.
  3. Personal guarantees – usually required of the owners or other principals, even from well-established businesses. This could include a second lien against your house, or other personal assets.
  4. Supporting documentation – includes copies of important papers that support the information contained in your business plan. For example, a lease, an operating license, a certificate of incorporation, a partnership agreement, a tax return, letters of reference, distribution agreements, contracts, invoices or vendor quotes should all be included.

Before submitting to potential lenders, you should go through your loan application with an experienced third-party, especially if this is your first time applying for a loan. Try reaching out to the Service Corps of Retired Executives (SCORE), a part of the U.S. Small Business Administration  (SBA) that provides counseling to small businesses. You should also meet with the lender once your application is finalized because they can also be a source of sound financial advice.

Cost –Most business loans are priced off of the reference rate, also known as the prime rate.  The reference rate is set by large lending institutions, and hovers around 3% above the Fed Funds Rate.  Because the reference rate moves in tandem with market rates, it acts as a good index for a wide variety of loans, including small business loans. So a business might receive a loan offer like ‘prime + 0.75%’, which is 0.75% above the prime rate.  Also, adjustable loan interest rates typically adjust in step with the reference rate.