NKBA: Search for Financing Begins with a Detailed Loan Proposal
Hackettstown In order to gain the financing necessary to grow their businesses, kitchen and bath dealers much convince banks to lend them money and a strong financial proposal can go a long way toward achieving that goal, according to the National Kitchen & Bath Association.
While banks may seem reluctant to lend money for business needs, in reality, they are interested in loaning money, since this is how they make money. They do not, however, have a desire to lend money to a company that they believe is not worth the investment.
The Small Business Administration, SCORE, banks and others have developed guidelines for businesses to follow when they are in need of financing, reports the NKBA. These guidelines assist a business in clearly and effectively communicating financial needs, as well as anticipated sources of prepayment.
When filing for a loan, a proposal should always include a cover
letter that briefly explains the applicant's background, the nature
of the business and the amount and purpose of the loan request. The
letter should also touch on requested terms of repayment, how the
funds will be used to benefit the business and how the loan will be
repaid. The information in the letter should be kept short and
simple, as further details will be included within the proposal,
The proposal itself should supply the loan officer with detailed information about the nature of the industry and the particular business, including industry background and trends and how the business fits within the industry structure. The proposal should include answers to the following:
- Who are you? Your character and your ability to manage your business should be reviewed.
- What are you going to do with the money? This will determine whether the loan should be short- or long-term. Money used to buy seasonal inventory will need to be repaid faster than cash used to purchase fixed assets.
- When and how do you plan to pay it back? The banker's judgment of your business ability and the type of loan requested will be a deciding factor.
- Does the amount requested make suitable allowance developments? This is decided on the basis of your financial statement, including allowance for unexpected conditions and the collateral pledged.
- What is the outlook for business in general and for your business in particular? The applicant needs to pay close attention to the preparation of income and cash flow projections to support the ability to repay the loan.
- How strong is your management ability? The lender will be interested in your demonstrated ability as a manager in your field.
- What is the ratio of business debt-to-net worth? The lender will examine your dollar investment in the firm, and will be less likely to consider investing funds if you are not willing to invest your own. The borrower should be willing to invest one dollar of personal funds for every two dollars of the loan.
- How is your debt-paying record to suppliers, banks, a home mortgage holder and other creditors? Bankers will check personal credit rating, so make sure yours is up to the scrutiny. Check your credit history for errors and inaccuracies, and have them corrected, before filing the application.
- How are the company's past earnings? If this is a previously existing company, its past ability to repay loans may weigh heavily on the decision. The applicant needs to reaffirm with the lender how the loan will benefit the firm.
- What is the value and condition of your collateral? Every loan must have two identifiable sources of repayment usually cash flow from operating profits and collateral pledged to secure the loan.