4 Essential Considerations of a Bank-Friendly Business Plan
Your business plan is not an academic exercise or a hoop to jump through, it's a living document that shows investors, advisors and business partners that you are serious about making your dream reality.
Opinions expressed by Entrepreneur contributors are their own.
Do you dream of someday owning your own business? You're not alone. The 2014 Working Adult survey conducted by Harris Poll and University of Phoenix reveals that nearly two in five working Americans who do not currently own their own business want to do so in the future. An important first step to realizing that dream is writing a thoughtful business plan.
Some people will tell you that if you're starting small, or believe you have a fail-safe idea, you don't need a business plan. Don't listen to that advice!
"Without taking time to research the market and competitors, and validate the solution, it is really hard to effectively launch and run a successful business," says Sabrina Parsons, CEO of Palo Alto Software and an expert in business planning.
She cites a Cranfield University study that shows businesses that plan and track grow 30 percent faster because they are more aware of what's working and what's not. A clear, well-thought out business plan helps you secure financing, launch your business effectively, monitor the state of your business, and make rational adjustments in response to changing business conditions.
Related: 6 Critical Questions Your Business Plan Must Answer
Here's a snapshot of the standard components of a business plan:
- Executive summary: A brief and compelling overview of your business idea and your path to success. Don't write this first. This should be the last section you tackle, reflecting and summarizing the details in the rest of your plan.
- Company description: A high-level review of the different elements of your business that helps potential investors understand the goal of your business and its unique proposition.
- Market analysis: This illustrates your industry and market knowledge, as well as your business-specific market research findings and conclusions.
- Organization and management: Your company's organizational structure, details of ownership, profiles of your management team, and the qualifications of your board of directors.
- Service or product line: This describes your services or products, emphasizing the customer needs you serve and the benefits you provide to customers.
- Marketing and sales: A comprehensive look at your market penetration, growth, distribution and communications strategies, as well as your sales strategy.
- Funding request: Your current and future funding requirements, and how you intend to use the funds.
- Financial projections: A package of documents common to all businesses, including income statement, balance sheet, cash flow statement and capital expenditure budget.
- Appendix: Any supporting materials.
The first thing a great business plan does is open doors to secure small-business financing. One of the more common forms of acquisition financing can be found through SBA loan programs. But lenders won't even consider a conversation with you until they've seen your plan, and it must provide the specific information they are looking for.
Here are four essential considerations as you write your plan that create red flags or green lights from a funding perspective.
1. Financial projections
"A bank is looking primarily at your financials, and trying to understand whether you actually know and understand how much cash you need, and whether the business looks financially viable," Parsons says.
If your financials don't pencil out the way the bank needs them to, your funding is a no go. Two key indicators that lenders look at are your individual global cash flow (comprising personal cash flow, personal debt, business cash flow projections and business debt) and your debt service coverage ratio (DSCR), which indicates that your business can cover the debt it takes on.
"Get your personal financials in order," Parsons advises. "And understand your cash levers so you speak intelligently to the loan officer about what you need in a loan or credit line."
2. Your experience
Your experience makes a key difference to how lenders perceive your credibility and funding worthiness. Have you had previous profits and losses responsibility? Can you show previous experience in your target industry? (As an example, lenders may be reluctant to fund a restaurant venture whose owner has no previous food industry experience.) How can you demonstrate that you have the ability to manage your particular business successfully?
One useful and simple exercise during planning is to create a two-column list. Column A identifies the key factors needed to operate your business successfully. Column B maps your experience and accomplishments to those key factors. Make it as easy as possible for a lender to see that you and your team have what it takes to manage the business successfully. If you determine that you don't have credible experience in a key area of your plan, solve that issue before you ask for money.
Related: 8 Reasons to Update Your Business Plan Right Now
3. Marketing strategy
Your lender wants to know that you know how to attract new customers. Whether yours is a small independent business or a new franchise location of a national company, the bank wants to see evidence that there is a target market of people who want what you're offering, and that you have innovative ideas about how to reach them -- and how to differentiate yourself from your competitors.
4. Location consideration
If your business needs to be visible to attract customers, then location matters to lenders. They'll have questions about whether your business is on a corner or off street and hard to spot, and what the auto and pedestrian traffic counts are on your street. Does your location make it easier or harder for customers to reach you?
Addressing all the elements necessary to a business plan can feel overwhelming to entrepreneurs. It's important to remember that the goal is to be thorough but concise. Banks know what they are looking for, and it's your job to make it as easy as possible for them to find it. You don't need a 50-page document. Provide clear, meaningful information and let it speak for itself.
Make sure you get input at every stage of your planning from trusted third-party advisors -- your financial expert and business experts in your field.
Finally, "don't reinvent the wheel," Parsons says.
There are plenty of great tools available online to help you complete a well-focused and professional-looking business plan. Make sure you read the reviews and only take templates, assistance or advice from credible sources. And never pay for a sample business plan. You'll find plenty of free samples online to get you started, including 500 sample plans for a variety of business categories at bplans, and this online planning tool from the Small Business Administration.
Your business plan is not an academic exercise or a hoop to jump through, it's a living document that shows investors, advisors and business partners that you are serious about making your dream reality. And that's only the beginning of its usefulness. Successful entrepreneurs know that planning never stops.
One of my earliest mentors told me that even the best plan is wrong as soon as you open your doors for business, when you discover that some of your assumptions are incorrect or that you have unforeseen challenges to solve. Smart entrepreneurs use their plan to track performance, evolve their decision-making and create their roadmap for growth.
"If you learn how to engage in regular planning, your business will be more successful," Parsons says. "Why not do something that helps your business grow 30 percent faster?"
Related: 4 Reasons Why Nobody Can Write Your Business Plan Better Than You