A business may require a loan, for starting a new business / for the purpose of enhancement of the existing facilities/ for the purpose of adding the new facilities, or a loan for operating activities.
To borrow a loan, the borrower has to prepare a request letter addressing the lender, containing all the relevant information, called a loan request letter.
The loan request letter is part of the cover letter. This request letter is to be attached to the loan application.
The lender asks for some information about the business, the loan request letter should contain the basic details about the business and your request, as mentioned below:
- Details of the borrower/lender.
- Brief description/profile of the business.
- Why the loan has been sought?
- Financial statements
- The loan amount for business.
- Application of the loan amount.
- Collateral details
- A list of enclosures
Approval of a loan depends on how well you present, yourself, your business, financial needs, therefore, the loan application should be prepared very prudently and it should clearly describe the planned utilization of the loan.
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You have to show the bank that you have the ability to repay the loan and interest thereon in a timely manner.
Your target should be to make the lender believe that this business is quite good and will generate a huge amount of money on the amount invested.
Download sample loan request letter from a manufacturing company to the bank:
Those who are seeking the loan need to prepare a loan application which will be presented to the bank or any other lender from whom the loan is sought.
Though the lender could be anyone like it may be another business, a bank, an NBFC, or any other institution, but here for the purpose of better understanding, we will be discussing the loan proposal as if the Lender is a bank.
The loan application will contain all the relevant information in detail so that the loan can be processed in time and without any hustle.
The details are to be included depending on the nature of the business, however below are the things that every loan application will contain:
Brief about the business
You need to give brief about the business. Here, you should cover aspects such as:
- What do you do?
- Since when you are in this business?
- What is your market share?
- Where is your market?
- Who are your competitors and your customers?
Details of the management
Here, you should brief about the management of the company. This will enable the bank to know that who is running the business, what is the background of the management? What are their skills? Their educational background, qualifications among others.
Why the loan is being taken?
This is one of the key reasons which a bank would like to know. Why you are taking the loan? What you will do with the loan amount? So, make sure you are addressing your needs.
How much loan you need?
Once the purpose of the loan is identified basis that the amount should be decided, make sure the amount is in line with the requirement/reason you have mentioned. Your purpose and the loan amount should be in sync with each other. To justify your need, you can attach the supporting such as supplier’s quotation/ building cost, etc.
Banks are more concerned with how you’ll repay the loan amount and interest thereon. Be specific about the utilization and the repayment of the loan amount. Also, specify the period in which you will be able to repay the loan amount.
What will be the collateral?
Every loan agreement would require collateral so that the same can be sold in case the cash generated in the normal course of business is not enough to repay the amount.
Below documents are required as a supporting to your loan application:
- Articles of association and Memorandum of association
- Last year Balance sheet/Profit and loss account
- Budget for next 5 years
- Cash Flow Forecast
- ITR for the last 3 years
- Current account statement of last 1 year
- Results not less than three months old
Once everything mentioned below is done, draft sanction letter will be received from the bank having a detailed terms and condition of the loan programme.
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Sample format of loan application
Download sample loan application letter from a manufacturing company to the bank:
Please note that in the operation activities, a simple loan application would be sufficient to borrow.
Loan application in the normal course of business
Examples of the loan in the normal course of business operation along with the sample applications have been given below:
Working Capital Demand Loan
To meet its working capital requirement, a business may avail the facility of a working capital demand loan. The Interest, in the case of Working capital demand loan, is based on market conditions (subject to a minimum Base Rate). Repayment is to be made from time to time- Nevertheless payable on demand. The maximum drawdown period can’t exceed 6 months. Sample format of Working Capital Demand Loan is:
Short Term Loan
The purpose of the short-term loan is to meet General Corporate Expenses. The Interest, in the case of Short term loan, is based on market conditions (subject to a minimum Base Rate). Repayment is to be made from time to time- Nevertheless payable on demand. The maximum drawdown period can’t exceed 6 months. Sample format of Short Term Loan is:
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