When you decided to finally open that small business you always dreamed of, you probably never imagined you’d have to write a long paper again. But if you need a small business loan, you might encounter a lender’s request for a business loan proposal. If it sounds like adult homework for your small business, it sort of is. Funny how life works like that, isn’t it?
But writing a business loan proposal isn’t as arduous as the English term papers of your youth. And there’s a good possibility you’ll need to learn how to do it during some point in your lifecycle as a small business owner. That’s because it’s very common to need small business financing at some point—and often this process requires the business owner to write a business loan proposal.
Similar to a business loan request letter, which is almost like a cover letter for your SBA loan application, the loan proposal is your chance to tell the lender why you think you deserve to be approved for a loan. And, because the loan letter is in your own words, it’s your shot to show the lender a side of you that they wouldn’t otherwise be able to get to know.
A business loan proposal is the abbreviated version of the business’s financial and operational history. If that sounds a bit overwhelming—or maybe more like math homework than English homework—don’t be intimidated. We’ll show you how to make it very manageable.
The business loan proposal is your chance to convey to the lender your passion for and knowledge of the business you own. The mechanics of the business loan proposal are the numbers contained in cash flow reports, balance sheets, P&L statements, revenue projections, personal and business credit histories, tax filings, bank statements, and a list of other numbers we will cover in detail.
A solid business loan proposal also will demonstrate to the lender that your business is currently in good financial standing and offer why you think you will be a good credit risk for the future.
A well-done business loan proposal can give the lender a condensed picture of where your business stands financially. It can demonstrate management strength—or, frankly, weakness. If done correctly, your loan proposal can also reinforce your deep knowledge of your market and industry, and therefore your business. That’s what lenders really want to see!
A small business lender can look at the loan proposal and get a clear picture of your cash flow position as well as your future cash flow and revenue projections. And, if you’ve been comprehensive with your information, the lender could almost make the lending decision without going any further.
You can understand, then, why it’s important to mind what you say in your loan proposal and how you say it. So, let’s talk about exactly what needs to be in this business loan proposal.
It takes a lot of information to accurately represent your business. So, you’ll want to make sure you include your most impressive facts and figures in your business loan proposal. But you’ll also want to try to keep it as close to one page as possible. You also might be tempted to use industry-specific jargon, thinking that it’ll impress a lender. Don’t! Write in clear, easily readable, and concise language. Remember, this is a first impression. You only have one chance.
We’ll look at the needs for SBA loan proposals, which is the main place you’ll need a business loan proposal. Some bank loans and nonprofit lenders might require loan proposals, too—in which case, this outline will serve perfectly, too.
The first sentence of your loan proposal should always be who you are and how much you are requesting. Then, move into more basic information about your business:
Describe what your business does. How does it serve the customer? Describe your typical customer, your market base, industry growth, and your competition.
Make sure you indicate how your business generates income. This is especially important when a lender is looking to extend you credit and wants to feel safe about the probability of repayment.
For an SBA loan, your prospective SBA lender will want to know exactly what you plan to do with the proceeds of the loan you are requesting. That’s why your business loan proposal should include a detailed description of your planned use of the funds, along with any ancillary information about expected and variable costs, the quality of the investment, and its impact on your business.
For example, if you plan to purchase a large piece of manufacturing equipment, not only will the lender want to know about the equipment but also about the company from which you’re making the purchase.
Here’s the section in the business loan proposal where you get to the numbers. Repeat the loan amount you wish to receive and show the lender how you plan to repay it. Demonstrate this by referring to your cash flow projections, which you’ve so carefully calculated based on your previous year’s cash flow reports, P&L statements, and your current balance sheet.
Show how you plan to fit the new debt repayment into your current budget and indicate how the new loan will help increase income to facilitate that repayment in the future.
With an SBA loan proposal, if you have any other outstanding debts, you’ll need to furnish detailed information on them. You should include the individual or company’s name, address, contact information, and amount of the debt.
This may seem extreme, but remember, a lender’s first job above all is to ensure that they can recoup the risk they take when lending you money.
When you decide to write a business loan proposal for an SBA loan, you should know that the lender will want to see financial details on you and any business partners and management team you have. It may seem a bit invasive at first, but anyone who has been through the SBA small business funding journey knows exactly how you feel.
This means they need names, addresses, and contact information on any partners you have. And you can expect to have to furnish tax returns, bank statements, and credit reports.
While you’re gathering personal information regarding your management team, you’ll need to indicate whether any of them have previous management experience or industry-related experience that applies directly to your current business.
Lenders will want to know how much of your own money you’ve invested in the business. Your business loan proposal for an SBA-backed lender should also clearly indicate that your business doesn’t lend money or speculate, nor does it involve passive investments, pyramid sales, or gambling of any sort.
Every business needs a way to market and advertise their product or service. This is where you show the lender that you are proactive in trying to cultivate new business.
Briefly list any social media sites you use—like Facebook, Yelp, etc.—plus your website URL. If you use any other methods of advertising or reaching out to industry-specific groups to attract new business, include those here as well.
Once you’ve done the hard part of writing the loan proposal, you’re ready to gather the proof behind the story you’ve told. Remember to make it simple and straightforward for the lender to verify the information you’ve conveyed.
Along with the business loan request letter, you’ll need to attach this documentation to back up your claims:
Be prepared for the lender to ask you for lots of other financial documents during your application process. They’ll need them to go a little deeper while they evaluate your profile and risk. But you should at minimum be prepared with these, since they’re the backbone of the business loan proposal.
As we mentioned up top, a lender will usually ask for a business loan proposal when you apply for a traditional bank term loan or an SBA loan funded through a traditional bank. Each of these loan types will need similar information in a loan proposal. But SBA loans have a few requirements that make these loan proposals unique.
The two most popular loans for small businesses available through the US Small Business Administration’s loan guarantee programs are the SBA 7(a) Loan and the SBA CDC/504 loan—both of which require a business loan proposal.
Because SBA loans have so many advantages, and are the most affordable loans on the market, the SBA qualification process is hard. And the application process is cumbersome at best, so doing all you can to smooth out all of that paperwork gathering is a good idea.
That’s just what a well-written business loan proposal can do for you.
The SBA 7(a) loan is appealing to many small business owners because it can be used for a variety of business purposes. The longer term and lower interest rates make it easier to fit into a younger business’s future cash flow, while the lower down payments don’t put undue strain on the current budget.
Whatever purpose you have in mind for the loan proceeds you want, you’ll need to give all the relevant information you can about that use. For example, if you’re purchasing equipment, describe the equipment, how it’s used, why you need it, how it’ll improve the way you serve your customer, etc. The more specific, the better.
SBA-backed lenders also offer the CDC/504 loan, which is intended more for purchases of fixed assets such as land, real estate, or long-term equipment. Just as the 7(a) loan is engineered to work for the small business, so too the CDC/504 loan offers longer terms—some as long as 20 years. That enables your small business budget to handle repayment more easily.
Again, you’ll need to specify the intended purpose for the loan and give as many details as possible. Keep in mind that the lender’s perspective is always, “How will I get my money back here?” So, be sure to include information that addresses this question. How will this new loan create a new or additional income stream to help repay it?
To summarize, your business loan proposal needs to include:
Whew! That’s a lot of information to convey in a short and persuasive document written for a totally unknown person.
That said, don’t be intimidated by preparing your business loan proposal. Once you’ve compiled the information you need, you can use a business loan request letter template to make sure the information is formatted correctly. There’s no reason not to start it right now!
Meredith Wood is the founding editor of the Fundera Ledger and a vice president at Fundera.
Meredith launched the Fundera Ledger in 2014. She has specialized in financial advice for small business owners for almost a decade. Meredith is frequently sought out for her expertise in small business lending and financial management.