Potential lenders will want to know what the underlying reasons are for borrowing the funds – not just how the funds will be used. They want you to clarify how the funds will help you to achieve your business goals.
The loan purpose should outline:
- Uses – How do you intend to use the funds?
- Structure – Are the existing facilities in your business appropriately structured to meet short/long term funding needs?
- Ethics – Is the purpose of the loan ethical?
- Funding Table – Provide a tabulated summary of the sources and uses of the funds.
How does this relate to my application?
It’s important to be transparent and specific about your loan purpose because it helps the lender to identify any risk involved with the loan. The level of risk has a direct impact on whether your business finance will be approved or not.
(This could also be good for you too because, if it turns out that your venture isn’t that risky, you could end up securing better loan terms.)
QUICK TIP: To make your loan purpose really clear, you may want to link it to one or more of the business’ cash flow drivers.