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What Bankers Look For in a Plan

When applying for a small-business bank loan, it's important to know what your business plan needs to contain to give you an edge.
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When you apply for a loan from a bank, almost all the best banks expect you to submit a business plan along with your loan application. But don't think just because you have a plan, you'll get a loan. If you're a startup, your chances of getting a bank loan are actually pretty slim. That's because banks are required by law to support loans with assets--called collateral--that protect the bank against a loan default. This legal requirement helps protect the banks' depositors against risk. And since most startups don't have the kind of collateral needed to support a business loan, most loans are made to existing business owners.

But note that I said "most." Since there's a still a chance you could get a bank loan, submitting a loan application to your bank is still a good idea.

What your bank does with your business plan once they have it tells you a lot about your bank. Some loan officers barely glance at the plan, check a box on the loan form noting that they have a copy, then file it away, processing the loan application based solely on the financial information you provided in the application.

Other loan officers will read your plan and discuss it with you, adding value and building a relationship. These bankers can provide a lot more than just a simple loan approval. If you're fortunate, that's the type of loan officer you'll be dealing with. So let's discuss the parts of your plan that they'll look at more closely than others:

  • The balance sheet is probably the first thing your loan officer will turn to. The balance sheet records your assets, liabilities and capital. Existing companies show a starting balance as a result of all past activities. Startups need a balance sheet that reflects starting capital, early startup expenses, assets either purchased or required, and existing liabilities.
  • Along with the balance sheet, they'll look very carefully at the profit or loss and the cash flow , which should be very closely related to the balance sheet and to each other. For existing companies, there should be evidence of steady cash flow in the past. That would show up in the historical balances. For both startups and existing companies, loan officers are going to expect realistic monthly cash flow for the next 12 months. Bankers know that profits aren't always enough to guarantee cash flow, so they'll look for an understanding of real business flows like accounts receivable and inventory.
  • Bankers will also look for hard evidence of founders and managers who know their business . That comes first in the descriptions of the backgrounds of the management team but also shows up in information about the business model, company history, locations, products and services, and strategy. Good bankers process a plan looking for evidence of success. They don't want to be part of failure, even if their banks' assets are protected by collateral.

SBA Loans Go Through Commercial Banks
The SBA works mainly though commercial banks when it loans money to small businesses. It guarantees a portion of the money that a bank lends you. If you're interested in getting an SBA-approved loan, you should know that you're almost always required to put up at least 30 percent of the value of the loan as collateral, meaning that the bank guarantees the other 70 percent through the SBA. Normally, a loan requires 100 percent collateral, so SBA loans are attractive to small-business owners who don't have the assets needed to cover the loan. The process is about the same as any other commercial bank loan and is managed by a commercial bank. The SBA also requires entrepreneurs to submit business plans as part of the loan process, but the exact implementation depends on the specific bank.