Start Your Own Business (34 page)

1. Cover sheet

2. Cover letter

3. Table of contents

4. Amount and use of the loan

5. History and description of your business

6. Functions and background of your management team

7. Market information on your product or service

8. Financial history and current status

9. Financial projections to demonstrate that the loan will be repaid

10. A list of possible collateral

11. Personal financial statements

12. Additional documents to support the projections

1.
Cover sheet
. This is the title page to your “book.” All it needs to say is “Loan application submitted by John Smith, Sunday’s Ice Cream Parlor, to Big Bucks Bank, Main Street, Anytown.” It should also include the date and your business telephone number.

2.
Cover letter
. The cover letter is a personal business letter to your banker requesting consideration of your application for a line of credit or an installment loan. The second paragraph should describe your business: “Our company is a sole proprietorship, partnership or corporation in manufacturing, distributing and retailing X type of goods.” The third paragraph is best kept to just one or two sentences that “sell” your application by indicating what your future plans are for your business.

3.
Table of contents
. This page makes it easy for your banker to see that all the documents are included.

4.
Amount and use of the loan
. This page documents how much you want to borrow and how you will use the loan. If you are buying a new piece of equipment, for instance, it should show the contract price, add the cost of freight and installation, deduct the amount you will be contributing, and show the balance to be borrowed.

5.
History and description of your business
. This is often the most difficult to write. The key is to stay with the facts and assume the reader knows nothing about your business. Describe, more fully than in the cover letter, the legal form of your business and its location. Tell why you believe the business is going to succeed. Conclude with a paragraph on your future plans.

6.
Management team
. Bankers know that it’s people who make things happen. Your management team might consist of every employee, if they oversee an important part of your operation, or it might be just you and one key person. It also includes any outside consultants you plan to use regularly, such as your accountant or banker. In one or two pages, list each person’s name and responsibilities. Where appropriate, describe the background that makes this person the right choice for that job.

 

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Loan officers at your bank may be a valuable resource in identifying state, local and agency assistance. They may have gone through the steps with other new business owners in your area.

7.
Market information
. You should begin these pages with a complete description of your product line or service, and the market it is directed toward. Next, describe how you have targeted your market niche and how successful you have been. Finally, detail your future plans to add new products or services.

8.
Financial history
. Most bankers want to see balance sheets and income (profit and loss) statements. As a startup, you will need to use projections. Bankers will compare these to norms in your industry.

9.
Financial projections
. This set of three documents—a projected income statement, balance sheet and cash-flow statement—should show how the business, with the use of the loan, will generate sufficient profits to pay off the loan. Your accountant can help you prepare these documents.

10.
Collateral
. Listing your available collateral—cash reserves, stocks and bonds, equipment, home equity, inventory and receivables—demonstrates your understanding that your banker will normally look for a backup repayment source. Each piece of collateral listed should be described with its cost and current fair market value.

11.
Personal financial statements
. As a startup, you will need to add your personal guarantee to any loan the bank makes. The banker will want to see your tax return and balance sheets showing personal net worth. Most banks have preprinted forms that make pulling these figures together relatively easy.

12.
Additional documents.
In this section, you can include whatever documents you feel will enhance your loan package. This might include a copy of the sales contract on a new piece of equipment, a lease and photograph of a new location, blueprints or legal documents. If you are introducing a new product or service, include a product brochure and additional market research information.

1.
Credit
. The lender will examine your personal credit history to see how well you’ve managed your past obligations. If you have some black marks on your credit, the banker will want to hear the details and see proof that you repaid what you owed. A couple of late payments are not a big deal, but two or more consecutive missed payments are. Get a copy of your credit history before you turn in your application. This way, you can find out about any problems and explain them before your banker brings them up.

2.
Character
. Character is hard to measure, but lenders will use your credit history to assess this as well. They take lawsuits, bankruptcies and tax liens particularly seriously in evaluating your character. They will also do a background check and evaluate your previous work experience.

3.
Capacity
. What happens if your business slumps? Do you have the capacity to convert other assets to cash, either by selling or borrowing against them? Your secondary repayment sources may include real estate, stocks and other savings. The lender will look at your business balance sheet and financial statement to determine your capacity.

4.
Collateral
. As a startup, you will most likely be seeking a secured loan. This means you must put up collateral—either personal assets, such as stocks or certificates of deposit, or business assets like inventory, equipment or real estate.