I've written numerous articles depicting the difference between a business plan used as an internal management roadmap and one used to acquire funding. Notably, lenders and investors make preliminary decisions after reading the cover letter, executive summary and sources and uses of funds. The rest of the exhibits support these three essential documents.
Even though the cover letter is rarely thought of as a business-plan document, it begins the process of selling your concept to the loan officer and finance committee. It is always individualized and recaps the conversations you previously had with the lender. A "To whom it may concern" type of cover letter dilutes the rest of your presentation.
Lenders have been known to reject applications after reading a poorly written cover letter, or one that is so impersonal that it seems as if the presentation is being widely shopped in hopes of getting a nibble.
Additionally, limit your cover letter to one page, but never more than two. There will be plenty of opportunities to elaborate in the supporting exhibits.
When writing the cover letter, keep in mind that a lender wants assurance that your loan will be repaid with principal and interest. By comparison, a venture capital investor is looking for a quick return of capital and a double-digit return on investment. Write your cover letter and all the documents that follow with an understanding of this objective. Delete verbiage and discard documents that do not further that goal.
Write about the specific discussions and verbal assurances that you were previously given by the loan officer. Mention the meeting-of-the-minds about how much cash you need to invest. Reiterate that the bank recently approved similar proposals in the same industry as yours.
Briefly explain how the loan proceeds will be used and refer the reader to your "sources and uses of funds" document for more details. Highlight the strongest aspects of your proposal and note the weaker points; and how you plan to overcome them.
For example, if you are a proven sales and marketing person, but lack management experience, mention that you intend to hire a manager.
Call attention to your extensive market research and that your projections are based upon trade association data, interviews with successful business owners in the same industry or Risk Managements Association (RMA) data.
Lenders often compare your financial ratios to the ratios in "RMA Annual Statement Studies," and you should aware of how closely yours match up. But no two businesses are precisely alike and variances from RMA's data should be explained -- especially if yours is a niche business.
Lenders like niche businesses. Otherwise they believe it will difficult for you to compete with larger and better-capitalized companies that are more entrenched. So explain how your business is different and why it will succeed.
The cover letter for venture capital investors should identify an exit plan telling how and when your investors will be paid back. Do you plan to go public in a few years? Will you merge with a larger company? Or will the cash flow be adequate to pay the investors back?
You should also discuss return on investment. How much will the investors get for taking the risk?
Always recommend approval of your application as your final thought rather than passively asking if there are any questions. If you cannot recommend your proposal to the loan officer, don't expect him to recommend it to his finance committee.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA's 2006 national "Journalist of the Year" award winner. He is a former entrepreneur, commercial mortgage banker, commercial real estate dealmaker and business lender. You can follow him at www.Twitter.com/JerryChautin
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