How To Write A Loan Application Letter To Get A Loan For Your Small Business

So here’s the truth: 

Business loans are the lifeline for small businesses, especially in a tough economy like Nigeria’s. 

As a small business owner, you’ve probably faced situations where you needed cash but didn’t have it. Maybe you need to buy more stock for your store or upgrade your equipment to keep up with demand. Whatever the reason, this is where a business loan steps in as your personal “Awoof”.

Now, there are several sources to get loans for your business, like applying for the SMEDAN loan we discussed in a previous article. Other sources include business loan apps, neo banks like Moniepoint, Fair Money, Carbon, etc., microfinance banks like LAPO, or standard commercial banks like GTBank, Access, FCMB, etc.

Still, you may want to get your loan from family, friends, cooperatives or other business owners.

In many cases, these loan sources have digital fronts through which you can simply click a few buttons to apply for a loan. Some even lend through social media platforms like WhatsApp or Instagram. However, where a loan application letter is needed to back up your clicks or is the only application method, many business owners get stuck.

In this piece, we’ll go over everything you need to know about crafting a convincing loan application letter that lenders cannot reject, what to include in your application letter and when you should even consider getting a business loan.

Ready? Go!

What is a Loan Application Letter?

If it sounds elementary to start by defining what a loan application is, it’s because business loans are often confused with other forms of business financing like equity financing, invoice financing, and revenue-based financing.

A loan application letter is your formal request to a lender, asking them to give you some money to sustain or grow your business. It’s your first shot at convincing the lender that you’re a serious business owner, and that you’re not just asking for money to flex or japa.

In this letter, you’re laying out your reasons for needing the loan and showing them that you’ve thought things through. You’re not just saying, “I need money”; you’re explaining what the loan will be used for and how your business is going to make enough profit to pay it back. 

To make a lending decision, the lender wants to know that you’re not a bad risk, and your letter is your opportunity to tell them, “I’ve got this under control.” You do this by including the right information in your loan application.

What You Should Include in a Loan Application Letter

Now, it’s not just about asking for the money, you need to include some essential points to make your application solid. 

First off, make sure you clearly state the amount of money you need. Be specific, don’t just say “I need money.” If it’s ₦500,000 you need, say that.

Next, explain the purpose of the loan. This is where you go into detail about how the money is going to help your business grow. Maybe you want to further develop a new product, expand your store, or maybe your business has been booming, and you need more stock to meet demand.

Whatever it is, paint a detailed picture of how the funds will push your business to the next level.

Next, financials, or better said, “repayment plan.” Lenders want to know how you plan to repay the loan, so give them a brief breakdown of your business finances. 

Let them know you’ve got sales coming in, and even if your cash flow is tight, you have a plan to repay. If you’ve taken loans before and paid them back, mention that too. It shows you’re a responsible businessperson who always pays back borrowed money in full.

Lastly, make sure you include your business details — the name of your business, how long you’ve been running, and what industry you’re in. This gives the lender a sense of who you are and what you’re about.

That said, let’s dive into the actual structure of your business loan application letter.

Format of a Business Loan Application Letter

Your loan application letter doesn’t need to be long or complicated, but it must be well-structured and professional. Now, open your writing pad, Doc, or Word, crack a few knuckles to get your fingers kicking, take a deep breath and follow this simple format to craft your letter:

1. Header: This is the first thing the lender sees, so make it neat. Include your name, business name, address, phone number, and the date. Then, write the name and address of the person you’re addressing (the bank or lender). 

You can use the right-left address format or left-left format, whichever works for you. If you have a letterhead, even better!

2. Salutation: Start with a formal greeting like “Dear Sir/Madam” or, if you know the name of the person in charge of loan applications, much better! Use that.
3. Introduction: In the opening paragraph, introduce yourself and your business. Briefly mention how long your business has been operating and the type of services or products you offer.
4. Loan Request: This is where you go straight to the point. State the amount of money you’re requesting and the reason you need the loan. Be clear and concise.
5. Business Plan and Financials: In the next few paragraphs, explain how the loan will benefit your business. Give a brief breakdown of your current financial situation, expected future profits, and how you plan to repay the loan. You don’t need to include full financial statements here, just the key points.
6. Conclusion: Wrap up your letter by thanking the lender for considering your request. You can also mention that you’re available for further discussions or to provide additional documents if needed.
7. Signature: Sign off with “Sincerely” or “Yours faithfully,” followed by your name and your position in the business.

But a format is not enough! I’m gonna show you some samples you can study to create the best version of your business loan letter.

Sample of a Loan Application Letter

Let’s assume you’re Amaka, a small business owner and you’re writing to ABC Bank to request a loan for her shop expansion. Here’s a sample letter:

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Amaka Obi
CEO, Amaka Fashion House
23 Ojo Street, Yaba, Lagos
0803-123-4567
22nd October 2024

The Branch Manager
ABC Microfinance Bank
45 Marina Street, Lagos Island, Lagos

Dear Sir/Madam,

Re: Loan Application for Business Expansion

I hope this letter finds you well. My name is Amaka Obi, and I own Amaka Fashion House, a clothing and accessories store that has been operating successfully for the past three years in Yaba, Lagos. I am writing to request a business loan of ₦1,000,000 to support the expansion of my store.

Over the past year, my business has grown significantly, and I have seen an increasing demand for our products. I need to increase our inventory and create more space for customer interactions to meet this demand. The loan will be used specifically to rent a larger shop, purchase new clothing stock, and invest in marketing to attract more customers.

Currently, my business generates a monthly revenue of ₦500,000, with a net profit margin of about 20%. With the store expansion, I project that this revenue will increase by 40% within the next six months. I am confident that the loan will help my business grow, and I have a solid plan in place to repay it over 12 months. I have enclosed my business plan and financial statements to provide more details about my business and repayment ability.

I appreciate your consideration of my loan application and am happy to provide any additional information or documentation you may require. I look forward to a positive response and am confident that this funding will help my business achieve its full potential.

Thank you for your time and assistance.

Yours faithfully,
Amaka Obi
CEO, Amaka Fashion House

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In the letter above, Amaka was clear about her needs, provided important financial information, and presented a realistic repayment plan, all in a professional tone. 

Following a similar structure when writing your loan application letter can significantly improve your chances of securing the funding you need for your business.

The next section is a must-read because it can save you from making grave mistakes. These are the; 

Do’s and Don’ts of Writing a Loan Application Letter

Do’s:

• Be Clear and Concise: Get straight to the point. Make sure you clearly state the amount of money you need and why you need it. Don’t leave the lender guessing.
• Be Professional: Use a formal tone and proper language. Even if you’re writing to a microfinance bank or a local institution, maintain professionalism.
• Include Financial Details: Always back up your request with solid numbers. Mention your revenue, profits, and how you plan to repay the loan.
• State the Purpose: Clearly explain how the loan will benefit your business. Whether it’s for expansion, equipment, or additional stock, be specific.
• Provide Supporting Documents: Include relevant documents like your business plan, financial statements, or any other proof that shows your business is thriving and can repay the loan.
• Proofread Before Submitting: Grammatical errors or a poorly written letter can leave a bad impression. Double-check your letter to ensure it’s error-free.

Don’ts:

• Don’t Beg: Your loan application letter is not the place to sound desperate. Banks don’t give loans out of pity. Be confident and show that you have a solid plan.
• Don’t Be Vague: Saying things like “I need money to grow my business” without explaining the specifics won’t get you far. Always provide detailed information.
• Don’t Overpromise: Avoid unrealistic claims like “My profits will triple in two months.” Be honest and base your projections on actual data.
• Don’t Leave Out Repayment Plans: A lender wants to know how you plan to repay the loan. Failing to mention your repayment strategy makes you look risky.
• Don’t Include Unnecessary Information: Keep the letter focused on your business and loan request. Personal stories or unrelated details are distractions.

When Is It Right to Write a Letter of Application for a Loan?

It’s important to know the right time to apply for a business loan so you don’t end up biting more than you can chew. Business isn’t a movie. Here are a few key moments when it might be the right time to write that loan application letter:

• When You’re Expanding Your Business: If your business is growing and you need more stock, a bigger space, or even new equipment, a loan can help fund that expansion.
• When You Have a Clear Repayment Plan: Before applying for a loan, ensure you have a reliable income stream that can handle the monthly repayments. Applying for a loan without knowing how you’ll pay it back is a risky move.
• During Seasonal Demand: Some businesses experience peak seasons where demand is higher. If your business needs more resources to meet seasonal demand, that’s a good time to apply for a loan to boost inventory or hire extra staff.
• When You’re Improving Business Operations: Maybe you need new technology or better infrastructure to make your operations more efficient. This is an ideal time to seek a loan as it directly improves your business.
• When You Have a Solid Business Plan: Having a clear, structured business plan showing how the loan will increase your revenue or improve your operations is key. This is when lenders will most likely approve your application.
• In Times of Cash Flow Challenges: Cash flow issues are common for small businesses. When you have pending payments to make, but your customers haven’t paid you yet, a loan can help bridge that gap.

Timing your loan application is just as important as writing a strong letter. Understanding when your business genuinely needs that financial boost, and having the numbers to back it up, ensures that you’re applying at the right time.

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