Filling out a loan application is the easy part. But creating the proposal doesn’t have to be intimidating either. Find out how to improve your chances of approval when applying for bank loans.
Financing a business is a tricky business – especially when you’re first starting out.
You need money as capital to get your business off the ground. But you don’t have much in the way of assets yet.
You can always apply for credit cards but that may only yield you a small amount of cash.
So, what do you do when you need a significant source of capital? You apply for a business loan.
If you had to obtain financing for your start-up, you may already be familiar with the steps. Banks and other lenders lend money to businesses based on certain criteria, such as creditworthiness and collateral. Banks require a lot of documentation for serious lines of credit. And whether this is your first loan proposal or your fifth, you can always make it better.
It’s important to prepare all necessary documents, such as your business plan, financial statements, and loan proposal, before applying to improve your chances of approval.
But first things first…
What Is a Business Loan Proposal?
Banks want to know you and your business before they approve a loan. It’s all about risk management from their side of things. The proposal provides key information that helps lenders in their lending decisions, allowing them to assess your business’s creditworthiness and loan eligibility.
A loan proposal is a bit like a cheat sheet about your business’ operational and financial history. If you’ve written a business loan request letter, loan proposals may seem familiar. They’re both cover letters for a small business loan application.
And they’re a chance to show potential lenders who you are and why you think you deserve a loan.
Is It Necessary?
Business loan proposals are mandatory for most lenders. But don’t do it because it’s mandatory documentation. Think of it as a way to plead your case to a lender.
Understanding Business Finance and Planning
Before you even start preparing your business loan proposal, it’s essential to have a solid grasp of your business finance and planning. Lenders want to see that you understand your financial situation inside and out. This means having up-to-date financial statements, a clear business plan, and a thorough understanding of your cash flow, assets, and equity.
A well-prepared business plan not only outlines your business goals and strategies but also demonstrates to lenders that you have a roadmap for success. Your financial statements—such as balance sheets, income statements, and cash flow statements—give a snapshot of your business’s financial health and help lenders determine your ability to borrow and repay a loan.
If you’re considering unsecured business loans, a strong financial track record is especially important, since you won’t be offering collateral. On the other hand, if your business owns valuable assets, you might qualify for secured loans, which can sometimes offer lower interest rates. Understanding your own financial position will help you decide which loan type is best for your business and how much funding you should request. By taking the time to review your finances and plan ahead, you’ll be better prepared to approach lenders with confidence and secure the funding your business needs to grow.
Understanding Loan Types and Interest Rates
When it comes to business loans, there’s no one-size-fits-all solution. Different loan types come with their own interest rates, repayment terms, and features, so it’s important to explore your options before making a decision. For example, some loans have variable interest rates, which can change over the loan term and impact your loan repayment plan. Others offer fixed rates, providing more predictable repayments.
Small business loans are a popular choice for many businesses seeking working capital, while equipment finance is ideal if you need to purchase or upgrade business equipment. An overdraft facility can help manage short-term cash flow gaps, and a lump sum loan might be the right fit if you need a significant amount of funding upfront. Each loan type has its own advantages and considerations, so think carefully about your business’s needs and how you plan to use the funds.
Understanding the differences between loan options, including their interest rates and repayment schedules, will help you avoid higher interest rates or unfavourable loan terms. Take the time to compare products, read the fine print, and determine which loan type aligns best with your business goals and financial situation. This way, you can make an informed choice that supports your business’s long-term success.
What’s in a Business Loan Proposal?
The length and scope of a loan proposal may vary from lender to lender. Also, the business proposal may be lengthier and more in-depth if you’re making a larger loan request.
Ideally, though, each business loan proposal contains the following components:
Title Page
The title page is relatively self-explanatory. Make sure you have these basics on the page:
- Name
- Title
- Business name and address
- ABN
If you’re a company, don’t forget your Australian Company Number (ACN).
Executive Summary
The next component of a loan proposal is the summary. Summarise your entire proposal in this section. Include elements like a description of yourself and your business. Also, include how you intend to use the loan to meet company goals. Be sure to mention how much equity you have invested in the business to demonstrate your financial commitment.
It’s easier if you save this section for after you’ve completed the entire proposal.
Details
The detail sections make up the bulk of your loan proposal. This is the section that lenders scrutinise when assessing risk.
Business
This section helps lenders understand your business as well as how you plan to use the loan. Included details may be:
- Business structure
- Location
- Premises
- Staff details and management team
- Products and services
- Operations plan
Assets such as property, equipment, or inventory can be used as collateral to secure a loan, which may improve your borrowing capacity and loan terms.
If your business is relatively new, you may use an updated version of a business plan. On the other hand, if you have a history of operation and have prepared an annual plan, you can use that in this section.
You can also use a chattel mortgage to buy vehicles for your business, allowing you to purchase and own vehicles upfront while financing the asset through a loan.
Market
Market details are sometimes included in the business details section of a loan proposal. This section includes your key vendors, customers and competition.
You can also include your marketing plan to demonstrate your marketing strategy to potential lenders.
Financial
Financial details may be where many small business owners start to sweat. But this is a relatively straightforward process. This section should include a minimum of three years of financials for your business. That means you need to show lenders your business balance sheets and income statements.
The financials should reflect year-end data for past years and the data for the last month of the current year. Additionally, you’ll have to include the relevant federal income tax returns for the same period.
Don’t forget to include projections of operations too!
Make your projections for one year, divided by month.
Inventory can be listed as a type of asset when applying for secured loans, as it can be used as collateral to support your application.
Security is important in loan applications—secured loans require assets as collateral, while unsecured loans do not require collateral but may have different terms.
Lenders will consider the interest rate and interest rate type (fixed or variable) when assessing your application, as these factors affect your repayment obligations.
If you are applying for a line of credit or overdraft facility, be sure to note the approved limit, which is the maximum amount you can borrow or draw without exceeding the set borrowing cap.
You can use outstanding invoices as collateral for invoice financing, providing a quick way to access cash flow based on unpaid invoices.
Unsecured loans are loans that do not require collateral, but they often come with a higher interest rate due to the increased risk for lenders.
Lenders also want to know how you plan on paying them back, so including a separate cash flow projection is vital. They look at your business’ net cash flow because it reflects your ability to repay the loan. Be sure to show how the loan will be repaid, including the repayment schedule and how you plan to pay each installment.
Sales performance can impact your ability to repay the loan and manage cash flow, so include information about your sales trends and forecasts.
There are various repayment options available, such as principal and interest or interest-only payments, which can provide flexibility for your business.
Sometimes, lenders may also ask business owners to submit personal financial statements. If you need to submit these statements, report your liabilities like:
- Other loans
- Lines of credit
- Leases
You’ll also have to include pertinent details like agency names, maturities, and terms when reporting liabilities.
Supporting Documents
This section includes any documents that can support your case. It may include BAS statements and an exit strategy. You can also include cash flow projections here if you didn’t mention it in the details section.
If you have client testimonials or media reports that can help your claim, don’t be shy about showing them off. Include them in this section to help your case.
Cash Flow and Loan Repayment: What Lenders Look For
One of the first things lenders examine when reviewing your loan proposal is your business’s cash flow and ability to repay the loan. A detailed cash flow statement, along with other financial statements, is crucial in showing that your business generates enough income to cover loan repayments and other expenses. Lenders want to see that you have a solid loan repayment plan in place and that your business is in good financial health.
To strengthen your proposal, include an executive summary that highlights your business’s strengths, a marketing plan that demonstrates your strategy for growth, and evidence of a proven market for your products or services. Your track record, assets, and equity will also be considered, as these factors help lenders assess the level of risk involved. For guidance on effectively pitching your business plan to a lender, see this resource.
A clear repayment schedule, tailored to your business’s cash flow, shows lenders that you’ve thought through how you’ll manage repayments and avoid outstanding debts. By preparing a comprehensive loan proposal that addresses these key areas, you’ll reassure lenders of your ability to repay the loan and set your business up for success.
Extra Tips for Strong Proposals
Here are some extra tips to help you write a great proposal to go with your loan request:
- Be clear and concise. Lenders appreciate proposals that get straight to the point.
- Provide accurate financial information. Double-check your numbers to avoid mistakes.
- Highlight your business strengths. Show what sets your business apart from others.
- Address potential risks. Acknowledge challenges and explain how you plan to overcome them.
- Include supporting documents. Attach any relevant financial statements, business plans, or projections.
Another tip: If you need fast access to cash, consider invoice financing. It’s a quick way to get funds by leveraging your outstanding invoices, helping you improve cash flow without waiting for customers to pay.
Tip #1 – Research, Research, Research
Lenders like seeing facts and figures that support your claim. Make sure you do due diligence and research your business, market, and economy inside and out.
Tip #2 – Keep It Simple
You may use industry jargon all day long, but lenders probably don’t know the jargon. Try to keep your language simple and easy to understand. When in doubt, go with a simple structure to avoid possible confusion.
Tip #3 – Set Clear Goals
When you set clear goals for your business, it’s easier to determine if you need this loan. After you set those goals, you can include them in your business proposal
Tip #4 – Ask for Help If You Need It
Every small business owner has to write a business loan proposal at one time or another. But they’re not as straightforward as they seem. If you find that you need help, don’t be afraid to reach out to an expert.
Submitting Your Loan Proposal
Once your loan proposal is complete, submitting it properly is the final step in the application process. Make sure your proposal includes all the necessary documentation, such as up-to-date financial statements, a detailed business plan, and personal financial statements if required. Clearly state the loan amount you’re seeking, the desired loan term, and your preferred repayment options.
Your proposal should provide a thorough overview of your business’s financial situation, goals, and how you plan to use the funds. Lenders will review your application to determine your creditworthiness and the likelihood of your business’s success. A well-prepared loan proposal demonstrates your ability to repay the loan and increases your chances of approval.
Take the time to review your proposal before submitting it, ensuring all information is accurate and complete. By understanding the application process and presenting a strong, organized proposal, you’ll be in a better position to secure the funding your business needs to achieve its goals.
It’s Time to Put Your Best Foot Forward
The prospect of writing a loan proposal may seem daunting but it doesn’t have to be.
Take your time and create an outline of all the things you want to convey in your proposal. Research each element and where you want those details.
Create a checklist to make sure that you include everything you need to convey a strong case. And don’t forget that you can always ask for help if you need it.
You have a passion and a need for your business. It’s time to show lenders who you are and what your business is about.
Are you ready to take the next step? Unsecured Finance Australia can help you with your next small business loan. Click here for more information.
