As part of the loan application procedure, a borrower will write and submit a letter to a potential lender. The request for a loan is made in writing, together with the requested loan amount, the intended use of the money, justification for the lender to approve the loan, and specifics on how the borrower intends to pay back the loan.
Worry no longer, though, as this carefully selected piece serves as a guide for drafting a loan application letter and lists important details to include.
Types of Loan Application Letters
You should often use one of these two sorts of loan application letters in either of two business funding situations.
1. Traditional bank term loan
To obtain business funding from your traditional bank lender, a loan application letter for a term loan from that company is required. Most often, traditional bank lenders favor lending money to companies that seem to be expanding and have the potential to become dependable clients.
The requirement that they demonstrate to the lender that their firm or start-up is a sound investment that will yield strong returns makes it extremely difficult for small business owners to obtain business capital from such organizations.
By highlighting the company’s financial sustainability, outlining the loan’s objective, and establishing the applicant’s capacity to repay the loan promptly and in full, a loan application letter for a conventional bank term loan aids small business owners in their efforts to secure business capital.
2. SBA loan
By guarantying a sizable part of loans made to small business owners, the Small Business Administration (SBA) helps lenders lower their risk exposure. Due to this, lenders can now finance small firms that otherwise would not have been eligible for borrowing under traditional fair conditions. Small business owners must adhere to the lender’s standards and SBA regulations when applying for an SBA loan, which is often backed by the federal government.
The borrower will typically be required to submit a loan application letter for an SBA loan that includes information about their personal finances, the finances of their business partners, the business’s finances and credit history, the amount of money they have invested in the business, and the sector the company operates in. The cover letter should also mention whether the applicant and their management team have prior experience in the industry that is pertinent to their current venture.
What To Include In A Loan Application Letter
A loan application letter is a crucial document that could make or break your ability to get a loan. A good loan application letter should be no more than one page long and no more than six paragraphs.
Here is a comprehensive guide to a loan application letter’s necessary elements and proper format:
- Header and greeting
A header and greeting section are essential components of a strong loan application letter. The header of the letter will include your name, the name of your company, your business address, your business mobile phone number, the receiver’s name, title, and contact information, including their physical addresses, as well as a clear subject line that states the purpose of the letter and the precise amount of money you are asking the potential lender for.
- Business loan summary
Briefly state the goal of the letter and the amount you are requesting from the potential lender at the start of the loan application letter. Additionally, you should briefly describe your firm, how the money will be used, and your creditworthiness in this part. When composing this part, think about excluding everything except the most important information to direct the reader to the letter’s body.
- Basic details about your business
Describe your business in detail in the first body paragraph of your loan application letter. Your company’s legal name, the type of business structure (such as a sole proprietorship, partnership, limited liability company, etc.), a brief but thorough description of your business’s specialization, the length of time it has been in operation, the total number of employees (if any), and your annual revenue and profit are all things you should include in this section.
Purpose of the loan
In the second body paragraph of your letter of loan application, explain why you need the money and how you plan to utilize it. You must be as descriptive and include data to help you quantify your aims while writing this section. However, stay away from making any ambiguous claims because doing so would give the lender cause for concern and cause them to reject your loan application.
Proof of your ability to pay
In order to be considered a feasible and desirable investment by banks and other traditional and alternative lenders, small business owners who wish to be eligible for a business loan must know how to position themselves in this way. Utilizing verifiable, factual evidence to demonstrate the company’s capacity to repay the loan is a useful strategy for achieving this.
Highlight recent balance or income statement summaries that show your company is expanding and financially sound, repayment plans for any other business debts you may already have (if applicable), and cash flow projections that show when you will be able to budget payments for your loan’s principal and interest-accrued charges.
Additionally, if your company is currently profitable, be sure to mention that in the loan application letter since this is typically taken into account to be sufficient evidence of a borrower’s capacity to repay a loan.
- Concluding sections
A strong loan application letter conclusion should include a paragraph referencing the financial statements of your company that are attached, a few sentences encouraging the reader to review the loan application materials and expressing your eagerness to meet with them, your signature and printed name, and a list of enclosures.
Your financial statements, the financials of any company partners you may have, including for SBA-backed loans, and any other papers required for processing the loan application will often be listed as attachments.
Loan Application Letter Sample
REF: Small Business Loan Request for [Dollar Amount]
To Mr/Mrs [Receiver’s Surname],
I’m writing you now to apply for a small business loan of [insert the amount you wish to borrow] for the purpose (s) of [explain the cause(s) for why you need the loan, e.g., expanding your company, attracting more customers, hiring more employees, etc.].
My company, [insert the name of the company and the nature of the business structure], started operating in the year [type the year] with [Insert the number of employees at the time of commencement] and one location. We have consistently expanded over the past 12 years, and as a result, we currently have [Write your current number of employees] and [Total Number of Branch Locations].
My company focuses exclusively in [Insert the industry category, such as food service, auto parts, construction and remodeling, etc.]. We market our products/services on numerous social media channels, such as [Mention the social media sites, e.g., Twitter, Instagram, Facebook, etc.], as well as on our official website, [give the URL of your company’s website]. You can follow our company’s development and success stories by going to those websites.
Our annual sales income was [insert the precise dollar amount] in the previous fiscal year, and the company made a net profit of [indicate profit in dollars or percentages]. These numbers demonstrate that we have successfully generated profits each year we have been in business while maintaining our cash flow for the previous [indicate the number of years].
We have developed a business development plan to reach our target market in far-off places in order to encourage our continuous growth. Our loan proposal will enable us to achieve our objectives of corporate growth. In addition, we expect our overall revenue to rise during the first three months of operation by [quantify in numbers or percentages], which will aid in loan payback.
We hope you will think about funding our plans to expand our business, and we aim to start this project in (said the estimated project start dates]. For your review, I’ve also included our business plan as well as the most recent versions of our income statement, business balance sheet, and business credit reports.
I appreciate you taking the time to read this letter of loan request and the financial records attached. Please contact me whenever it’s convenient for you.
[Name of loan applicant]
[Signature of loan applicant]
[Name of the company seeking the loan].
[List the given enclosures]
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