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.
