How to Get Banks to Say Yes to Your Small Business Loan
In my experience in banking, more than three-quarters of business plans that come with projection-based applications fall short in one or more key areas. Many of the plans I see consist of a few pages of hastily produced bullet points, falling well short of the detail and color about the business that banks need to make a credit decision.
Business plans are critically important for startups, high-growth companies or buyers seeking to finance the purchase of a business. In fact, they are a useful planning tool for any business, but especially for startups since they have no financial track record for a bank to examine.
Established companies that are planning for accelerated growth often need working capital, equipment or real estate financing to keep growing, and they need a solid business plan that identifies what will drive the planned growth and shows that their plan will result in adequate cash flow to assure repayment of the requested loan.
Businesses seeking loans to acquire other businesses (or individuals looking to buy a business) will need a thorough plan to describe the new ownership, and how they’ll successfully manage the firm, and what they see as their market opportunities and key clients.
A business plan is for the bank and your team.
Having a business plan is not just part of a bureaucratic check-list to secure a loan. Rather, the business plan can be a guiding document for the enterprise -- one that communicates critically important facts and ideas to management teams and employees. Writing the plan can be a crucial exercise in helping owners to think through the details as they plot their business’s future.
There are several core elements that a strong business plan needs to have. They apply equally to applications for loans backed by the Small Business Administration (SBA) and for regular commercial loans:
1. Detailed projections
To get to a “yes” on a loan request, banks need enough detail to be assured that your business will have enough profit and cash flow to service the debt. The plan should flesh out precisely how a company will attain its revenue goals and expense estimates, and how it expects to succeed over the long term, not just the next couple of years. It’s not enough to say "the total market for our service or product is $100 million, and we expect to get 5 percent of it." Your banker needs to know exactly how you plan to achieve that revenue level by describing key relationships and how they will be converted into clients. The business plan should also provide a detailed analysis of the anticipated costs of operating and should consider the effects of economic and market trends. If your local job market is tight, for example, you should say so (your banker likely already knows), and say what your plan is for hiring employees and how that will affect labor costs as the company grows. The real point of the plan is to identify your key assumptions and provide the thought process behind them.
2. Marketing strategy
The plan should also outline the company’s marketing strategy in as much detail as possible. Before committing capital, a bank wants to know how the business proposes to market its products or services and the specific opportunities that it is trying to fill. The plan should answer the questions: What is the need for the company’s products or services in the area, and how will the company get its message out?
Related: Need a Business Idea? Here Are 55.
3. Management and ownership experience
To approve a loan, banks want to know that owners have the right background and experience to make the business work. That helps to assure banks that the projections have been thought through and can be successfully implemented. Different types of businesses call for different skills. An owner with a lengthy resume as a manager in a big firm may not have the ideal experience to start a restaurant. If the business is in a high-volume, low-margin industry, banks would feel more comfortable with an owner who has proven experience in managing costs. For business acquisitions, it is important to provide details on the plan for management transition.
4. Location, location, location
Depending on the type of business, small details about its physical location can be surprisingly important. If you are a breakfast café or coffee shop, you want to be located on the side of the street that people use for their morning commute. If the business is a road-side restaurant relying on passing drivers, it needs to be easily accessible for cars. Even for “destination” businesses that attract customers based on their reputation, location can be important. If you are a high-end hair salon, you don’t want to set up in a down-market strip mall. The plan should identify the location and why you believe this location supports your business model.
For entrepreneurs who lack the time or expertise to craft a business plan, there are two options backed by the SBA that provide expert assistance to small businesses free of charge or at very low cost. One is the Service Core of Retired Executives (SCORE), whose experienced volunteers will help clients ask the right questions needed to formulate a plan. The other is Small Business Development Centers, which have a variety of useful databases and systems to help in the planning process.
Remember, unlike investors, the highest priority for banks when lending is to ensure a return of capital, not a return on capital. With the right plan and demonstrated financial capacity to repay the debt, the chances of obtaining needed financing will go way up.