How get a business loan
How To Write A Business Financing Proposal
By Lawrence Flanagan
If you are seeking a loan or venture capital to finance a new or existing business, it is absolutely essential to develop a good business financial proposal.
Your proposal should include a brief history of the company, the funding needed, a detailed explanation of how the proceeds will be used and repaid (if a loan), complete information about the company's facilities, equipment, technology, products and/or services, production capabilities, markets, competition, sales strategies, management, employees and company goals.
It should also include pro forma financial projections for at least three years of operation, together with the company's current financial statements and tax returns for the past three years - if it has such a history.
Such a proposal is important for two reasons:
1. For any business seeking financing, most lenders and investors require a well-thought-out financing proposal, which is usually a modified or condensed version of a company's current business plan.
Although some components of a business plan cannot be included in a public stock offering prospectus (i.e. financial projections), it is not unusual for private investors or a bank to request the more detailed business plan and financial projections for review.
2. For any start-up or existing company, whether financing is needed or not, a current business/financial plan will help keep the enterprise on track. One of the leading reasons why businesses fail is because their managers did not develop or follow a plan. When prepared each year, complete with monthly goals, a sound business plan can serve as a valuable monitoring tool for all areas of any company.
The first step in raising business capital is to prepare a good financing proposal.
Certainly there are many forms a proposal can take, but if one is searching for a loan or equity financing, it should include the components listed below.
1. A Summary. This should be brief, no more than two to five pages long, and provide the following:
2. The Company. This opening section of the proposal should fully describe the historical development of the company. Include its formal name; legal structure (sole proprietorship, partnership or corporation); significant changes in ownership; business industry; its products and/or services (or those planned); acquisitions and subsidiaries (if any) and the dates when they occurred.
Include your investment and percentage of ownership plus that of others and each owner's role in the formation and operation of the company. If you are seeking financing for a non-operating business in the development stage, give as many of the above details as possible, and fully explain the investment you and/or others intend to contribute to the enterprise.
3. Products and Services. In this section, provide information about the company's products and/or services or those it proposes to offer. Include inventories in stock or to be purchased; their costs; current or estimated production costs; selling prices, and briefly present a sales forecast for the next three years.
When possible, list some of your suppliers and any credit terms they may offer. A good way to approach this subject is to present all of the information you would want to know about the products or services of a company if it was asking you for money.
The summary should be brief, just enough to whet the reader's appetite for more.
4. Use of Proceeds. When financing is needed to fund a new business or a project, use this section to describe how the money will be used (product development, inventories equipment, marketing, working capital, etc.), complete with cost figures for each line item. Be sure the funds requested are adequate to finance the business start-up or expansion planned.
If you are requesting a loan, explain the repayment schedule desired and refer the reader to the Cash Flow Projections to demonstrate how the loan will be repaid, with interest, in context with the company's other operating expenses. This is important because all lenders want to know when and how they are going to be repaid.
5. Marketing. This important section must provide the details concerning your marketing, advertising and sales plans - complete with projected sales and annual expenses for each product or service to be offered.
Include any marketing research and analysis data that will support your sales projections. Describe who your competitors are and explain how the company will be able to compete favorably in the marketplace. One of the major reasons for turning down a financing request is because the proposal submitted did not include,a viable sales and marketing plan.
Be honest and reasonable in your forecasts and forget about smoke and mirrors because just about everyone in the business of providing loans and venture capital will instantly recognize a "wild-eyed projection" when they see it.
6. Management. In this section, discuss the company's management, their individual job responsibilities, employment histories and education. Resumes may be submitted with your proposal, but they should be limited to one page or less for each manager. Include each manager's current or projected salary for at least three years plus any other forms of intended compensation. Fully describe any additions in management you are planning for the near future and the compensation to be paid.
7. Ownership. Furnish the names, addresses and business affiliations of all principal owners of the company's stock or those who have an equity interest in the business. Explain the degree in which these individuals are involved in the company's management. Also include the names and addresses of
the board of directors (if incorporated), and their areas of expertise. Describe the amount of stock (common or preferred shares) authorized (if incorporated), and the number of shares issued and outstanding.
If the enterprise is in the development stage, present the details about the panned ownership, and, if you are seeking a loan, include a personal financial statement (assets less liabilities) for each individual who will own equity in the company.
8. Technology. Describe the technical aspects or your products or services and mention any patents or copyrights you or the company may own.
Include any new technology you intend to develop in the near future and the associated costs. If you own the rights to or intend to purchase a unique technology, this is the section where the complete details should be disclosed.
All lenders want to know when and how their money is going to be repaid.
9. Employees. On a spread sheet, list all employees of the business by job and tabulate the projected wages and benefits to be paid for each individual over a three-year period. Always indicate the total number of employees the company plans to employ for each year (both full-time and part-time), because a number of federal and state loan programs use this information to determine the total loan amount they can provide. In some cases, this loan limit is $10,000 to $15,000 per job created or retained.
10. Facilities and Equipment. Provide a brief description of the company's offices, building, warehouse, store or other facilities; the type of construction (wood frame, concrete or steel); size of the space in square feet; mortgage or lease and utility costs, and describe any equipment now owned or that you intend to purchase. If new facilities and equipment are required, describe the company's needs fully, together with the costs.
11. Supporting Reference Information. In this section, list the names, addresses and telephone numbers of your business and personal banker, business credit references, legal counsel, accountant and auditor (if you have one). By furnishing this information up front, you will speed up the financing decision you are waiting for.
12. Business Financials. When seeking a business loan or private venture capital, your plan must include pro forma (projected) financial statements for up to three years into the future. The statements normally required are a balance sheet, profit and loss statement, sales forecast, inventory schedule and a cash flow forecast for each year of operation.
Providing supporting reference information can speed up the decision-making process.
If your company has an operating history, submit the above pro formas together with your business financial statements (audited or unaudited) for the previous three years and copies of the company's tax returns. Some lenders and private investors may also want to see your personal tax returns for the same period and a copy of your current business plan.
You may wish to include other items with your proposal, such as drawings, photographs of the facilities, equipment, products, etc. but when possible, attempt to keep the total document length to 50 pages or less. One way to view this short proposal philosophy is to imagine a desk piled high with 100 deals or more, and your job was to read and evaluate each one! It is only human nature to select the thin ones first.
If your proposal is easy to read, factual and contains the information required by a lender or investor, it does not have to be a book to gain a favorable response. Although some may argue the point, my advice is to keep it brief unless the project is exceptionally large and warrants the detail.
The other exception would be if you are asked to submit a copy of your business plan with the proposal. In this event, the business plan (usually a separate document), should include considerably more detail about how and when you expect to attain your business goals together with the same financial provided in the proposal.
Consider double spacing the text for easy reading (however, the financial projections are not double spaced). Number each page and include a table of contents for quick reference to the individual sections. Make several copies of your proposal for submission to prospective lenders and/or venture capital companies and keep the original in a safe place.
KEEP IT SIMPLE
Fancy covers or jackets are not required. It's what the reader finds between the covers that counts! Always enclose a cover letter with each proposal you mail, and use first class postage to ensure safe and prompt delivery.
It usually takes from two to three weeks to get an answer to a loan/investment inquiry letter and up to six weeks when a complete proposal is submitted. If you don't hear from the prospective source within that time frame, it's okay to call and politely inquire about the status of your request. No news is not necessarily bad news. It could mean they are seriously considering your proposal!
Incidentally, there is nothing wrong with mailing an inquiry letter or the proposal to several prospects at one time. Some states do limit the number of private placement prospectuses one can mail in a calendar year when they offer a company's shares of stock in exchange for funds, but this requirement does not apply to loan or investment inquiries when you are simply trying to determine if there is an interest in your company or a project that needs financing.
If you are searching for a loan but will consider an equity investment, be sure to state this in your inquiry letter and your proposal. A lender may decide not to give you a loan but might know of someone else who is looking for an investment opportunity. If you mention that you are willing to consider all options to properly finance your business, you could receive a referral to another source. Remember, you have to ask for referrals to get them.
A lender who turns you down may still be able to refer you to another source.
Developing a good financing proposal does require advance planning, some accounting knowledge, patience and writing ability, but most entrepreneurs do prepare their own. Check with a local book store or library to discover what books are available on the subject.
All information contained within BUSINESS OPPORTUNITIES HANDBOOK: On-Line is copyrighted. 2001. Reproduction of all or part by any means without express permission of the publisher is forbidden.Source: www.busop1.com