How to Write a Perfect Business Plan to Get a Loan?
Most successful businesses generally have banks or other financial institutions financing them in the form of loans and lenders do not view these as investments. This concept of debt financing is all about the business taking a loan and then paying it back, either in installments comprising the principal and its interest, or by way of interest payments only, which is followed by a balloon payment of the principal.
However, the lender’s main concern is getting back his money along with a fairly reasonable return. That’s why he may ask for a solid explanation of why such funds are required and how they will be utilized once the borrower receives them.
And this is where exactly the borrower is required to submit a detailed business plan which explains the business’s projected growth in future as also any contingency plan that explains how the business will repay the loan, even when faced with financial difficulties in future.
Writing a business plan needs careful thinking, time and plenty of effort to deliver the perfect product. You need to mention details of the following compulsorily in your business plan:
This is one of the most convincing components of your business plan. A strong and well-documented cash flow convinces the lender that the borrower will pay back the loan along with the pre-determined interest. However, a mere projection of future cash flow isn’t enough. Most lenders ask for cash flow statements as also income statements and balance sheets spanning the last three years at least. Tax returns are also wanted for the same period.
Every business plan must ideally include some co-signers to provide an additional protection layer to lenders. It becomes more viable if the borrower’s own capability for taking on additional debt is somewhat shaky, a co-signer whose creditworthiness is already established and known in the market makes a distinct difference.
For startups or with lenders with whom you aren’t all that familiar, getting a bank loan may be difficult without collateral. Collateral is a tangible guarantee against which the loan is disbursed and which the lender can sell off to recover the lent money in case the borrower defaults. It may be in the form of equipment, machinery, inventory or even real estate owned by the borrower.
Bankers insist on collateral because by experience they know that any entrepreneur who puts his personal assets at risk are more likely to repay than those who don’t. That’s why when you write your business plan, mention the full list of assets that can be put up as collateral to convince the lender that he stands to grab and sell them in the long run to recover his money should you default on payments later.
Lenders prefer to disburse loans based on the borrower’s character as also his financial strength. In fact, the latter’s management abilities and track record are major concerns for any lender when he evaluates a loan application. If your business plan shows that you have managed one or more business organizations successfully, it will definitely increase the chances of getting a loan even if your current business is just a startup.
A crucial component of any business plan is the borrower’s marketing plans in future. So ensure that your business plan amply addresses crucial marketing issues like your immediate competitors, me-too products, price wars, buying habits of a fickle-minded public as also other assorted market-related risks. Unless you do this, your lender won’t know that you do recognize such risks and are working on methods to tackle them.
This could be a serious impediment to getting that much desired loan because ultimately it’s the cash flow in future that helps largely in repaying the loan.
Be practical & specific
Your business plan must quote a reasonable amount when you make a request for a loan. Most lenders do not give loans in excess of 12 percent of the business’s annual revenue. So if it has an annual revenue of say, $50,000, asking for a loan of $200,000 doesn’t make sense. Moreover, the chances of getting rejected also rise. It is also extremely important that you clearly spell out what you are going to do with the money like using it to tide over a working capital crisis or to expand the business. If you aren’t specific and upfront about your intentions to use the funds, any lender might be skeptical about shelling out the cash.
Never ever forget to mention your credit score in your business plan because that’s the principal gauge of your creditworthiness. All lenders have set thresholds they work with and failure to match that standard will result in the loan getting rejected. Moreover, once he sees your credit score, he immediately knows whether he’s going to work with you or not and thus, a lot of valuable time gets saved.
These again are of vital importance when you write your business plan and should include the annual revenue, which is indicative of your ability to repay the loan. Secondly, it’s your average monthly bank balance which indicates how you manage the inflow of cash.
It never pays to fudge figures when you’re writing your business plan because everything that you submit is subject to verification and the slightest discrepancy could get you blacklisted by the entire lender fraternity. Moreover, your business’s profitability also matters immensely because even though your sales may be good and you have a solid bank balance, your business may not be profitable overall and this makes lenders hesitant to lend a helping hand.
In sum, an accurate, informative and truthful business plan will work in your favor always. Since all lenders ask for certain documentation to verify any information that you disclose in your plan, ensure that your answers match what those documents reveal. Supplying thorough and informative data is always advisable as is avoiding delays in providing follow-up information, as and when required.
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