What to include in your business plan to ensure your chances of securing a loan.
All banks are in the business of providing debt financing at market rates. What this means is that they are providing loans to help launch or maintain operations of your business. There are a number of hard and soft factors that go into every decision a lender makes. However, the universal truth is that unlike investors, banks don't want to own a portion of your company, nor do they want to see you fail, forcing them to recall loans or even worse lose money they provided you.
As a result, every banker you meet - whether you are running an existing business or need funds to start one - will expect to see specific elements in your business plan. Clearly demonstrating these will increase your chances of receiving the loan you are applying for.
Keep in mind that bank loan applications can be just as long as your business plan. Remembering that every small business banker wants to minimize risk when making loans, you would be well served to have a reasonable plan that shows both reasonable upside, as well as sober understanding of potential downside. Aggressive projections that show straight growth year over year may cause your loan officer to cringe. Realistic assessment of risk, however, will make you appear pragmatic and prepared.
Here are some key things you should include in your plan to appease the stringiest loan officers and bankers.
Every banking will want to see that your existing business is generating positive cash flow that not only covers your expenses, but also allows you to successfully repay the loan and interest. If you are starting a business, healthy cash flow projections are an important part of your overall financial package.
For existing businesses, be prepared to provide past cash flow statements audited or prepared by an accountant. Your income statement and balance sheet will also be requested.
For those of you who are just starting out in business or dealing with a banker you don’t know well, you will most likely need to put up collateral as part of your loan application. Collateral is just something the bank can seize and sell to get back some or all of the money you’ve borrowed in the event that everything goes wrong and you can’t pay it back with profits from operations. It may consist of machinery, equipment, inventory or, all too often, the equity you own in your home.
The main reason banks are looking at collateral, however, has nothing to do with their sinister desire to come after your home or second-hand equipment. They simply have learned from experience that entrepreneurs and business owners who have skin in the game tend to see their business through the tough times and stick with it longer than those who have no collateral committed to a loan.
If you have a limited ability to qualify for a loan on your own, or are unable to increase the amount of debt you carry, a co-signer, who in practice vouches for you by means of their credit-worthiness, is an excellent evidence to a bank that the funds they lend you will most likely be repaid.
If you have some issues in your personal credit history that are in need of addressing, a co-signer may be the best way to ensure that you can still move forward with your dream of owning a business. However, make sure that whatever commitment your co-signer makes to the bank on your behalf you will not leave them high and dry.
Marketing plans are now a much more important component of your business plan than ever before. Bankers are far too aware that reaching your end-user, customer or consumer is both more difficult and more important to ensure successful launch of your business. Your banker needs to know that you understand the need for a solid marketing strategy and will thus expect you to deliver a strong marketing plan as part of your application.
Bankers like to stress the personal aspect of their services. Many state that they're interested in making loans based on a borrower’s character as well as their financial strength. In fact, the borrower’s track record and management ability are concerns for bankers evaluating a loan application. If you can show you’ve run one or more other companies successfully, it will increase your chances of landing a loan to get a startup going.