A loan is a type
of debt. Like all debts, a loan involves
the re-allocation of money over a period
of time between the borrower and the
lender. The borrower initially receives
an amount of money from the lender.
This money is paid back either in full
or in regular installments (with interest
of course).
Acting as a provider of loans is
one of the principal task for financial
institutions such as a bank. For banks,
loans are generally funded by deposits.
That's how banks usually earn. Their
deposits are loaned out and when the
borrowers pay with interest, voila!
Earnings for the bank.
Other types of debt include mortgages,
credit card debt, bonds, and lines
of credit. A mortgage is a very common
type of debt used by many individuals
to purchase housing. In this arrangement,
the money is used to purchase the
property. The bank, however, is given
the title to the house until the mortgage
is paid off in full. If the borrower
is unable to pay, the bank can repossess
the house and sell it, to get their
money back.
The abuse in the granting of loans
is known as predatory lending. It
usually involves granting a loan in
order to put the borrower in a position
that one can gain advantage over him
or her.
When applying for a loan, you must
prepare a written loan proposal. Make
your best presentation in the initial
loan proposal and application. You
may not get a second opportunity.
Always begin your proposal with a
cover letter or executive summary.
Clearly and briefly explain who you
are. Include all there is to know
about you. Your business background,
the nature of your business, the amount
and purpose of your loan request,
your requested terms of repayment,
how the funds will benefit your business,
and how you will repay the loan. Keep
this cover page simple and direct.
Many different loan proposal formats
are possible. You may want to contact
your commercial lender to determine
which format is best for you. When
writing your proposal, don't assume
the reader is familiar with your industry
or your individual business. Always
include industry-specific details
so your reader can understand how
your particular business is run and
what industry trends affect it.
Loan Repayment: Provide a brief written
statement indicating how the loan
will be repaid, including repayment
sources and time requirements. Cash-flow
schedules, budgets, and other appropriate
information should support this statement.
Existing Business: Provide financial
statements for at least the last three
years, plus a current dated statement
including balance sheets, profit &
loss statements, and a reconciliation
of net worth. Aging of accounts payable
and accounts receivables should be
included, as well as a schedule of
term debt. Other balance sheet items
of significant value contained in
the most recent statement should be
explained.
Projections: Show how your operations
will make money. Include earnings,
expenses, and reasoning for these
estimates. The projections should
be in profit & loss format. Explain
assumptions used if different from
trend or industry standards and support
your projected figures with clear,
documentable explanations.
Collateral: List real property and
other assets to be held as collateral.
Basically, collateral is the bank's
way of ensuring that they will get
something back from if you're unable
to pay back the loan. Few financial
institutions will provide non-collateral
based loans. All loans should have
at least two identifiable sources
of repayment. The first source is
ordinarily cash flow generated from
profitable operations of the business.
The second source is usually collateral
pledged to secure the loan.
Your bank is in business to make
money. Consequently, when a bank lends
money it wants to ensure that it will
be paid back. The bank considers the
5 "C's" of Credit each time
it makes a loan.
Capacity to repay is the most critical
of the five factors. Capital is the
money you personally have invested
in the business and is an indication
of how much you will lose should the
business fail.
Collateral or guarantees are additional
forms of security you can provide
the lender. If the business cannot
repay its loan, the bank wants to
know there is a second source of repayment.
Conditions focus on the intended purpose
of the loan. Character is the personal
impression you make on the potential
lender or investor.
