Preparing a successful loan proposal

When applying for an investor mortgage loan with a hard money lender or a private/portfolio lender, the investor will be asked other items in addition to or in place of the general loan application paperwork (i.e. bank statements, pay stubs, credit application.) There is a system to use a professional approach in presenting the loan package. Lenders want to be assured that: 1. You will repay the proposed loan. And that there is sufficient value of the property (collateral) to pay off the principal in the event the loan goes into default. 2. It is your job to provide the lender with these two assurances in a clear and concise format. Lenders reject loan requests when they cannot understand the risk or the risk is greater than acceptable to them. An acceptable entrepreneur's risk is often greater than an acceptable lender's risk. Choosing the Right Lender Cultivate the relationship before requesting a loan. Who do you know that can introduce you to the bank's president or chief loan officer? Open a bank account before making application for a loan. It is more difficult for a lending institution to say "no" to a customer. The Loan Presentation The loan presentation should contain several sections with extensive narrative and exhibits personalized to your situation and your lender's underwriting. Use quality paper that is easy for the lender to copy and in an attractive and organized type style which is easy to read. The following is a suggested table of contents that may be modified for different situations. Table of Contents Cover Letter A. Photographs B. Memorandum (Executive Summary) C. The Borrower (Description of you and your company) D. The Collateral (The Property in question) E. The Underwriting (Financial soundness of your plan) F. Recommendation (Summary)

Cover Letter The cover letter is your first opportunity to sell your loan. Lenders have been known to reject loans after reading a poorly constructed cover letter or one that is so impersonal that the presentation looks like it is being sent to every institution. The cover letter should be no more than one page long. Explain how the loan will be used. Highlight the strongest aspects. Note the weak points and how you plan to overcome them. If the collateral is particularly strong, emphasize it in your cover letter. Always recommend approval of the loan as your final thought rather than meekly asking the loan officer to call if there are any questions. If your presentation is for venture capital (as for loans on commercial properties,) you'll need to talk about an exit plan. How and when will your investors get paid back? Do you plan to go public in a few years? Or will you refinance them out of their investment? You should also discuss return on investment (ROI) and capitalization rate (CAP). There are worksheets in the Resources Menu under Real Estate Spreadsheets, which will help you in these calculations. How much will they get for taking the risk? And when will they get it? Photographs An interesting photo on the cover of your presentation can get your proposal read first. Put lots of interesting photos inside. Get the most attractive shots you can and fully explain them. If real estate is the collateral, show the subject, comparables and the neighborhood. Captions under each photograph should tell the story you want the lender to know. Dont just write, for example, Front of the property at xxx Main Street, but This is the front exposure of the property to the main traffic area. Clip art and graphs used sparingly are good too. Cartoons and interesting artwork makes the lender's underwriting process more personal and enjoyable. Marketing yourself and your company well "proves" that you have the ability to market your product or service to your customers. You don't want to overdo it but think outside of the box. Memorandum or Executive Summary The memorandum is also called the "Executive Summary". Limit it to one or two pages. It should contain the most important facts. Ask if he has an example he's willing to share with you. Ideally, you can use his format with your words. Your mission is to get the loan officer and you in a team effort in presenting your proposal to committee. Name and describe the legal entity. Explain why you chose that type of ownership. Describe your business and its owners. Your objective is to sell to the lender the

previous success of the company, its principals and officers. Enclose a biography of all the principals and key employees. Do a detailed sources and uses of loan funds. It should clearly describe how the requested loan will be used. List other sources of funds, your own personal contribution and how it's to be used. A simplified example is below. Sources & Uses of Funds Sources of Funds Cash from owner previously contributed Additional cash from owner Proposed loan from bank Total funds available Uses of Funds Working capital Purchase building Total uses of funds

50,000 50,000 200,000 $300,000 175,000 125,000 $300,000

Here are some things to keep in mind when preparing your startup budget and needs for working capital: Construction Supplies Subcontractors Work Holding Costs: Insurance, Legal Fees, Permits, etc. Salaries and Labor Costs Miscellaneous Expenses: Telephone Bills, Office Supplies, Vehicle Costs, etc. Extra Capital for emergencies and incidentals Do not ask your accountant or a packager to generate your operating numbers. You must do your own research and believe the pro-forma is achievable. Internalize the numbers and make them part of you. Lenders reject loan requests from entrepreneurs who don't know their own deal. Unless specifically asked for, do not include income tax returns. They can raise more questions than they answer. Also exclude meaningless financial schedules. The Collateral Your objective is to "prove" the value and the marketability of the property used as collateral.

When the collateral is weak at the present time (i.e. the property needs a lot of work and/or rezoning,) get the lender to focus on other aspects of your proposal that are strong (i.e. strength of the principals, large cash investment, strong cash flow, etc.). The Underwriting (Analysis related to lender's criteria.) Some successful loan applicants leave it out entirely and hope that their proposal meets the lender's benchmarks. When you initially selected the lending institution, you should have determined how they will underwrite your loan. Ratios such as acceptable ROI or CAP rate differ in importance from lender to lender. Calculate the ratios that the loan officer told you were important. Always add subjective comments focusing on ratios that exceed the required minimum. Wherever a ratio falls below the lender's minimum requirements, stress compensating strengths of your proposal (such as good cash position of the principals) and other ratios that exceed the minimum requirements. A business plan for your internal use only should modify this section to identify your risks. Underwriting is the essence of getting an approval. If your loan fails to underwrite, don't submit it. There are several other alternatives: 1. 2. 3. 4. Review your assumptions and rework your numbers. Try to get it to underwrite by being more aggressive with your assumptions. Search for a lender that has more aggressive underwriting standards. Make your loan underwrite by changing the deal. Typical changes include reducing the loan amount, raising more capital and offering additional collateral (such as a private residence).

Recommendation Recommending your proposal to the loan officer and the loan committee is essential. If you don't believe in it, no one else will. Your recommendation may be brief. Recap all of the strong features of the deal and state that granting your loan is prudent.