How to Apply for a Loan

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  • Before You Start
  • Build it Yourself or Hire a Developer
  • Concept and Planning
  • Creating & Managing Your Team
  • Site Selection
  • Design and Pre-Construction
  • Financing
  • Construction
  • Lenders recommend you begin the loan process once you have a sense of what type and size of site you are looking for, and what resources you have. It may be appropriate to contact potential lenders before you have a final site identified. Lenders can help identify financing options for your projects and give a sense of their terms and requirements. The loan process begins during the site selection phase and continues through the development process and beyond, as your relationship with your lender extends for the life of your loan.

    How to Apply for a Loan

    (1) Get Prepared

    Lenders will ask many questions and you will have to provide several documents during the loan process. It is good to have the following documents ready before contacting them:

    • Audited financial statements for the last three years
    • Five-year cash flow projections for the project (if available)
    • Needs assessment and feasibility study for the project (preliminary ideas for project size, location, and space requirements)
    • Preliminary project costs (project budget) and sources of funds (how much cash you have reserved for the project, what grants or other funding you intend to apply to in order to finance the project)
    • Initial site idea
    • School business plan detailing the school’s strategic plan
    • Copy of charter and authorizer contact information
    • Presentation of school model, student achievements, and how it serves the community needs
    • Biographies for management team and board of directors

    (2) Contact Lender

    Discuss your loan request with your lender. Some lenders have application forms they will ask you to complete. Others will simply ask you to provide a list of documents and/or to meet with you. The lender will perform an initial review of your materials.

    (3) Obtain Term Sheet from Lender

    If a lender is interested in financing your project, they will typically prepare a term sheet or proposal letter. This document is usually non-binding, meaning the institution expresses its interest but is not legally committing to lend money. The term sheet typically outlines the loan structure and its preliminary terms and conditions, as listed below:

    • Loan Amount: Generally subject to appraised value of school facility and project cash flow
    • Term and Amortization of Loan: May not match (also see “Loan Terminology” section
    • Payments: May allow an interest-only period before regular payments (principal and interest) begin
    • Interest Rate: Fixed or variable, usually index plus spread
    • Fees: Underwriting/application fee, origination/commitment fee, legal/ documentation fees
    • Collateral/Guarantee: Usually real estate (property the school is purchasing), lease assignment (when school is renting its facility), or guarantee from a supporting organization or wealthy individual
    • Reporting Requirements: Typically include annual audited and quarterly financial statements, enrollment information, change in management team, student achievement scores, and other reports to and from authorizers — lenders use these to understand changes happening at your school
    • Loan Covenants: Financial ratios to be met by your organization, such as debt service coverage, liquidity, and leverage; other covenants imposed by lender, such as subordination of management fees
    • Conditions Precedent to Closing: Specific items the lender will need to obtain and approve prior to closing the loan. These can include final project budget, commitment of other sources of funds (e.g., grants), building permit, zoning approval changes (such as conditional-use permit), and charter renewal
    • Expiration Date: Deadline for the school to sign and return the term sheet

    Read the term sheet carefully. It contains important details the lender will use in the final loan. There is typically a list of items or actions required before the lender will officially commit to the loan. Approach your lender with questions you have about specific items, and negotiate the terms as much as you can. If you agree with the preliminary terms and conditions for your loan, sign and return the term sheet, usually with a check for an underwriting fee and/or deposit for third-party report expenses. See the Financing Evaluation Worksheet to compare terms offered by different lenders.

    (4) Provide Documents and Information Required by Lender’s Underwriting Process

    Your lender will collect additional information usually listed in the term sheet or verbally so the lender can complete the underwriting process and secure credit approval for your loan. This is also called due diligence process. It involves a detailed and deeper look at your organization, financial performance, education outcomes, project feasibility, and evaluation of the risks associated with your project. Your lender develops a base case and sensitivity scenarios with the cash flow projections you provided. The lender reviews the charter, usually contacts your authorizer, and will come for a site visit to evaluate your operation and meet with your management team. The lender performs real estate due diligence, including ordering an appraisal, environmental reports, soil test reports/geotechnical reports, seismic evaluation report (if necessary), property condition report (if necessary), survey, title reports, lien and tax searches, and reviews the lease and/or purchase and sale agreement.

    For construction loans, your lender orders a plan and cost review to confirm the budget, timeline, and qualifications of the construction team. Your lender reviews the architect, engineer, general contractor, and project manager qualification statements and contracts, and list of subcontractors, as well as the contractor’s schedule of values, the estimated draw schedule, and the payment and performance bond. Your lender also reviews the plans and specifications, building permit, and any other permit or license required for the project. They will review your project budget and verify the levels of contingencies. This process can take a couple of months, so you need to maintain regular communication with the lender. Some due diligence starts in the underwriting and is finished in the closing process, after the commitment letter is issued.

    (5) Obtain Commitment Letter from Lender

    Once your lender obtains credit approval, they usually issue a commitment letter, allowing you to officially commit to your facility project (e.g., close on the purchase, contract with a general contractor, etc.). The commitment letter resembles the term sheet but is more specific and detailed. It is a legal commitment by the lender to make a loan, subject to the conditions specified.

    Again, read this document carefully. The commitment letter is an outline for the loan documents. If you agree to the terms and conditions outlined in the commitment letter, you sign and return it, usually with a check for the commitment fee and/or deposit for legal fees. Lenders expect little to no negotiation of the loan terms and conditions from this point forward.

    (6) Complete Loan Documentation and Close Your Loan
    Once you receive a commitment letter from a lender, the actual closing day is usually 30 to 90 days away. The closing day is when you sign the final loan documents and receive the loan proceeds to purchase your facility and start construction. Lenders will prepare legal loan documents based on the terms and conditions outlined in the commitment letter, and will finalize their due diligence. Your project may have to complete other specific items before closing, such as building permit and finalization of the construction documents.

    You will review the loan documents with your counsel. These documents typically include a promissory note, a deed of trust, a loan agreement, and a security agreement. The closing date is normally set about a week ahead of time. You will arrange to go to a title company office to sign the final loan documents. The title company manages the settlement statement and title work. They finalize the transfer of money for fees and an initial disbursement of loan funds. Within a couple of weeks, you will receive a set of final executed loan documents that you should save. Congratulations on your loan!

    Related link in Essential Resources: Initial Documents Requested by Lender

    Related link in Essential Resources: Sample Loan Intake Form

    Related link in Essential Resources: Sample Due Diligence List

    Related link in Essential Resources: Financing Evaluation Worksheet

    Legal Disclaimer:

    Nothing in this material should be construed as investment, financial, brokerage, or legal advice. Moreover, the facts and circumstances relating to your particular project may result in material changes in the processes, outcomes, and expenses described herein. Consult with your own professional advisors, including your financial advisors, accountants, and attorneys, before attempting to consummate any transaction described in this material.