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.

About The Author

Frederic Madore is the founder of the Loan Information Center. Get the best information about loans.
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