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Term Loans - « back to Articles

Knowing when to approach a lending institution for a term loan is a valuable skill.

Most businesses will rely on financial support in the form of a term loan (a loan which is to be repaid over a specific period of time). Entrepreneurs may approach lenders with excellent ideas but fail to get the money because they do not know how to prepare a professional looking and informative loan proposal.

Loan proposals are an accepted way lenders determine whether businesses will receive loans. Lenders are seeking established, reliable businesses with the best possible chances of repaying the loan. When money is in high demand you may need to convince the lender that your need is greater and your proposal is better than other available loan opportunities.

Lenders know small businesses can be a relatively risky, so they want to find out as much as possible about a business before they will authorize a loan. If you apply for a term loan you will be asked to provide financial data and more general information like:
  • who you are
  • what you plan to do with the money
  • what will be the long term effects of these additional funds on your business
  • what loan security you have
  • your financial strengths and weaknesses
The lender will consider one important point; "Can your business earn the profits necessary to repay the loan while retaining enough funds to operate." The answer to this question will depend on the quality of the management. The lender will be very interested in:
  • your management capability
  • your education
  • experience of you and your staff
  • personal and company strengths
  • weaknesses and your strategy to overcome them
  • past achievements
The lender will be interested in the non-financial details of your business such as:
  • the company history
  • descriptions of product and/or service offered
  • growth potential
Your proposal will need to clearly state what you plan to do with the loan and if the term loan is to be only one of your sources of financing, what other financing you intend to seek.

You should describe in specific terms the purpose of the loan.
  • support a business startup
  • expansion
Provide information on:
  • purchase costs
  • construction costs
  • quotes from contractors
  • quotes from suppliers
  • savings benefits
Quantify any tangible results for the lender. Example, if a loan is requested for a proposed building upgrade which will reduce energy costs and improve productivity, the goal is likely to be a strong argument in favour of the loan.

The lender will need to know how the loan will effect your overall operation. Financial projections including an operating forecast and a cash flow projection for at least the coming year will have to be provided.

The lender will require sources of security for the loan. You must be prepared to offer your securable fixed assets such as:
  • land
  • buildings
  • equipment
  • machinery
  • vehicles
Some of the documents a lender may request from prospective borrowers are:
  • resumes of the business employees and its owners
  • personal financial statements when applicable
  • complete financial statements for at least three years
  • cash flow forecast for the coming year
  • list of securable assets
  • relevant leases
  • details of other loans and obligations
The work may seem excessive at first but if you thoroughly and accurately present your need it can assist you and your business to get the term loan it needs.
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