Getting your project funded

By Kasun Wijayaratne 

When requesting a loan from a bank or a financial institution to finance a business project, one of the areas where the borrower pays least attention is “how to make an effective proposal to the lender?” which is the key to obtain speedy credit.

A borrower is often told to submit a ‘Business Proposal’ together with various technical documents. However, this generic approach may result in the loan request being relegated to a stack on the loan officer’s desk and perhaps could even lead towards a rejection.

This article will guide you through preparation of a business proposal and would provide you with necessary tips to attract debt or equity capital.

A business proposal should contain details on as to how you intend in achieving your business plan, outlining:

• Amount of credit required (money needed)
• How such money would be spent or used
• Expected returns from the project
• Security to be offered

Apart from serving the purpose of seeking credit, such a business proposal would provide you additional benefits and comforts when carrying out the operations of your business in an effective manner. As a fundamental management tool, such a proposal would:

• Compel you to write down material facts clearly and objectively
• Help you to identify and clearly define products, markets and suppliers
• Provide you with benchmark  to measure results
• Convey to the Lender a lasting impression of yourself and your company
• Allow others to assess your project and the probability of meeting the targets of the project

It should be noted that your business proposal will be based on your Business Plan, which is basically the written summary of:

• what your business is all about 
• where you intend taking it to
• how you plan to get there

There are many ways you can make your business proposal appealing and attractive. Stated below, in brief, are few points which you can implement in preparing an effective and acceptable proposal to the lender.  

Executive Summary or Memorandum of Salient Facts

The objective of the ‘Memorandum’ or in other words the ‘Executive Summary’ is to provide the lender an overall big picture about the project at a glance. Limit same to one or two pages.  It should contain the most important facts such as the project cost, requested loan amount, expected tenure of the facility, business background, ownership and the collateral offered. 

Sources and usage of funds

Make sure you briefly state your funding requirement for the proposed project and the intended ways of funding same precisely. It is extremely important to provide an equity contribution for the project. It gives the lender a sense of assurance of your ownership of the project. 

The collateral

Generally, lenders want to be assured that, your business would repay the proposed facility and that there are sufficient assets (collateral) to pay off the facility in the event same goes into default.  It is your responsibility to provide the lender with relevant assurances in a clear and concise format with regard to collateral.  

As stated above, collateral is a secondary way of repaying the lender in the event of a default.  It is not very likely that a credit facility for a startup business will be approved by the lender with zero collateral.  

Your objective is to “prove” the value and the marketability of the collateral which you offer.  Well-located real estate may be quickly sold close to the market value, whilst equipment could be liquidated at a deep discount.  Lenders try to place a liquidation value on collateral but turn lenient if they really want to execute the deal.

When the collateral is weak, it is important to draw the focus of the lender on other aspects of your proposal that are strong (i.e. strength of the ‘principal’ or ‘borrower’ in other words yourself or your company, the volume of the capital invested by you,  strong cash flows of the business etc.).  

The market and marketing plan

The words “market research” often scares entrepreneurs even if they have advanced educational backgrounds.  It’s not rocket science.  Your challenge is to determine and identify the customers for your product or services and how you would get them to buy your product or patronise your services. Furthermore, it is important to know the size and the stand of your customer base, how much would they pay to buy your product or services, how quickly would they write you the cheque. 

Ratio analysis (optional)

If you do not have the expertise and the technical skills, you may need your accountant to help you in this connection.  However, some successful loan applicants leave it out entirely and hope that their proposals meet the lender’s benchmarks. Nevertheless, it would be better if you can prepare a simple ratio analysis to establish your forecast and other financial parameters meeting the lender’s requirements and standards. Ratios such as debt service coverage (cash flow available for debt service/debt service) and return on assets (assets/profit) would differ in importance from project to project and lender to lender.

Photographs

Use them!  Since a picture would provide a vivid, visual sense of reality than a mere virtual idea created with words, it can improve the confidence of the lender. Get the most attractive shots you can provide and endeavour to elaborate the project visually.  

Marketing your strengths

Your proposal should be simply written and should be to the point. Whilst same should emphasise your strengths and the upside, it is important to recognise the risks and the downside as well. This approach would allow you to demonstrate to the lender that you understand the risk involved and know how to mitigate and cope such risk.

You need to build the confidence of the loan officer on the feasibility of the project and the effectiveness of the proposal. If you do not believe in your own proposal, nobody else would do so.  Therefore, you need to highlight the pluses and market your proposal.  Recap all the strong features of the proposal and make the lender feel that it is fit and in order to grant the facility.

Once your proposal is ready

With a good proposal in hand, it’s time to reach out to the people who are engaged in financing businesses. Here are a few tips:

• Start early. It can take up at times couple of months to arrange the financing you need.
• Start with the people whom you know and those who know you as well. If your banker, lawyer, insurance agent, accountant, friends or business associates cannot help, then ask for referrals and introductions. One introduction is worth many cold calls.
• Research sources before you make appointments. Get names of other clients, other similar businesses which the lender has financed, types of relationships the lender maintains, how the lender treat their customers (especially when a customer is in trouble).
• Don’t restrict yourself to one person within the lending entity. Get to know as many as possible who could influence the decision.
• Go to the people who know your industry, even those who have financed your competitors.
• Arrange an appointment by phone and outline why you want to meet them.
• Send your proposal, or at least the one-page summary, prior to the meeting.
• At the meeting, outline your request briefly and then summarise key points (not more than five) from the proposal.
• Be sensible in using your accountant and lawyer. One of them can accompany you to provide help or clarifications. However, make sure that you answer the questions asked by the lender. You are the one on whom the lender would rely upon to run the business.
• Listen carefully to all comments. If you hear the same reactions from several sources, consider changing your plan or approach.
• Always offer to follow up with more information. Respond to requests for information quickly.
• If you are turned down, learn why.  Re-assess your proposal, ask for reasons. Can you change your proposal? Who else could you see?

Try to assess how would the other party think and do differently putting himself in your shoes. The person may think you need more money than what you’ve requested, which may be right. It can also be the other way around. They might think that you are requesting excessive credit.

Conclusion

All businesses involve risks. It is important to identify them and determine how to overcome such risks. Don’t forget that the source (lender) too is looking for the risks in your proposal. You will raise yourself in your source’s estimation, if you had identified and placed on record how you would propose to deal with such potential risks and problems. Such initiative and approach by you would in-turn pave the way towards preparation of a successful business proposal and have your project funded with less hassle.

[Kasun Wijayaratne is a young banker who is employed with a leading bank. He holds a Master’s Degree in Business Administration from Cardiff Metropolitan University with a Merit pass and a Special Honours Degree in Human Resource Management from University of Sri Jayewardenepura. He is also a Chartered Global Management Accountant (CGMA) and an Associate Member of the Chartered Institute of Management Accountants – UK (ACMA-UK), Chartered Institute of Marketing-UK (ACIM-UK) and Institute of Bankers – Sri Lanka (AIB-SL). Also, he has obtained the Professional Postgraduate Diploma in Marketing from CIM-UK (DipM) and the Certified Practicing Accountant status from Australia (CPA – Aust). He can be contacted on [email protected].]