Are you planning to apply for an online Business Loan? Chances are that the lender will also request a Business Loan proposal. Read on to learn how to draft one and what characteristics it must include.
Preparing a well-documented, effective Business Loan proposal is the most crucial step toward getting an online Business Loan from a lending institution. After all, the loan proposal would be your first contact with a finance provider. So, you must craft a document that showcases your company in the best possible manner. The ultimate goal is to convince the loan company that you are ready to achieve business success and repay the borrowed amount on time. In the following sections, you will learn how to write an effective proposal for a Business Loan.
What is a Business Loan Proposal?
A Business Loan proposal is a document that describes your company’s financial and operational history. Before approving your Business Loan, lending institutions want to understand your business and gather information about your risk and working capital management. Many loan providers ask for a loan proposal to evaluate your position and determine your creditworthiness. A solid proposal letter demonstrates to the loan provider that your company has good financial well-being and can repay your loan in the future.
How is a Business Loan Proposal Different from a Business Plan?
While business plans and Business Loan proposals contain similar information, a loan proposal focuses more on the loan amount and your repayment plan. A business plan is a long-term, broad document that guides you during different business stages. It includes your business structure, operational strategy, and future perspectives. In contrast, a Business Loan proposal is a short-term, focused document that aims to secure the business's finances. While reviewing a proposal letter, lenders are more interested in your requested loan amount, its purpose, and repayment capacity.
Why Lenders Require a Small Business Proposal?
A small business loan proposal is required by lenders for several important reasons:
- Risk Assessment: Lenders use the proposal to assess the risk associated with lending to your business. By reviewing your business plan, financial projections, and proposed use of funds, they can evaluate whether your business is likely to succeed and generate enough revenue to repay the loan.
- Financial Health Check: The proposal provides a snapshot of your business's current financial health. Lenders analyze your financial statements, including income statements, balance sheets, and cash flow projections, to understand your business's profitability, liquidity, and ability to meet financial obligations.
- Loan Repayment Plan: Lenders need to know how you plan to repay the loan. Your proposal should include a detailed repayment plan that outlines how you will use the loan proceeds to grow your business and generate revenue, thereby ensuring timely repayment.
- Purpose of the Loan: Clarifying the purpose of the loan helps lenders understand how the funds will be used to benefit your business. Whether it's for working capital, equipment purchase, expansion, or other specific needs, a clear explanation in your proposal demonstrates foresight and strategic planning.
- Creditworthiness Evaluation: Your proposal serves as evidence of your creditworthiness. It shows your ability to manage finances responsibly, make informed business decisions, and mitigate risks. This information helps lenders determine the likelihood of loan repayment based on your past financial performance and future projections.
What Makes a Good Business Loan Proposal?
A good small Business Loan proposal should be well-written and organised. Although it is a short document with only a few pages, you may need to attach a few additional documents to support its details. It should demonstrate financial stability, short sections, and specific business details. Here are a few characteristics that make a good Business Loan proposal:
- Simple and Plain Language: The Business Loan proposal format should be well-structured, easily understandable, and clear, devoid of acronyms and technical terms.
- Demonstration of Growth Prospects: The proposal should focus on how you plan to take your venture to success in the next few years. It should showcase multiple scenarios and contingency plans.
- Representation: If you don't have the time or skills to write an effective proposal letter, take professional help to showcase your strengths.
Business Loan Proposal Structure
Although your lender may suggest a proposal format with the required sections, a typical Business Loan proposal format contains the following sections:
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Executive Summary or Cover Letter
This section briefly describes your personal and professional background, including your business overview and planned usage of the loan amount. You may also design this section as a cover letter, summarising your personal and business details.
Provide relevant information about your business, licenses, legal structure, and current activities. You may also cover your qualifications, skills, and experience in this section. It may also include important details about your target customers, industry trends, marketing channels, current market conditions, etc.
Your business equity demonstrates your motivation to achieve success. This section contains your financial investment details in the business, including any cash amounts and retained earnings.
Clearly specify the amount you require as an online Business Loan and what you plan to use it for. Provide details about what you will do with the loan amount and where you plan to invest it. Moreover, explain how you decided on the requested loan amount with the help of estimates and quotes in calculations.
Based on the loan amount and repayment schedule, explain how you plan to repay the borrowed amount on time according to your working capital management plan and the projected cash flow. If you regularly experience fluctuations in the cash flow and sales, explain the other options and cash reserves you have to make EMI repayments in lean times.
In this section, provide a brief overview of your personal and business financial statements with the help of actual bank statements. Loan providers want to see your statements for the last few years and the current period. You can support your statements with financial records like income statements, net worth reconciliations, balance sheets, etc.
If you have more than 20% equity in the business, you must provide your personal bank account statements as well. Some lending institutions also require tax returns for a certain number of years. Find your lender’s documentation requirements to support your Business Loan proposal.
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Income and Cash-Flow Projections
This section will include the details of your project's cash flow and income statements. Also, discuss the changes you plan to make in the business if you fail to meet those projections. Provide projections for at least a year.
Explain what recourse the lender can use if you default on the loan repayment. Summarise the assets you can use as collateral. The loan company will have the legal right to sell that asset to recoup its outstanding balance. However, if you opt for a collateral-free Business Loan online, you don't need to provide any collateral against the loan.
The lender would want to know what other debts and financial obligations you currently handle. Even with enough income, EMI repayment may be challenging if you already pay for other commitments. Summarise your current obligations’ details here, including the entity, amount owed, EMI amount, repayment schedule, etc.
Conclusion
When you apply for a Business Loan for working capital management or any other purpose, a loan proposal will help the lender get a clear image of your loan purpose. It lets them evaluate your financial well-being, based on which they offer an adequate loan amount at a reasonable interest rate. Therefore, use the above tips to create a clear proposal that the lender can easily understand.
At Hero FinCorp, entrepreneurs fulfilling the eligibility criteria can get an unsecured Business Loan of up to Rs 40 lakh online with attractive interest rates and flexible repayment tenure of up to 60 months. Apply now!
Frequently Asked Questions:
1. How do you write a loan request proposal? Research and calculate the costs to create a loan request proposal according to your loan requirement. Project your business as financially stable with a high repayment capacity to get fast approval.
2. How do I write a good Business Loan proposal? A good Business Loan proposal must be written in simple language, demonstrating your growth prospects and showcasing your strengths. Use the right Business Loan proposal format to write it efficiently.
3. What are the five steps of writing a business proposal? The five steps to writing a business proposal are:
- Research information about your competitors, customers, and working capital management.
- Strategize your business goals and activities.
- Calculate the costs, expenses, and funds.
- Draft a clear and convincing proposal.
- Revise and proofread before submitting.
