How to Write a Perfect Business Plan to Get a Loan?
What to Include in 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.
First impressions last. And with your creditors, your business plan is your first (and last) impression. Increase your chances of getting approved for a business loan and enrich your know-how on the matter.
This FAQ is designed to help you decide what to include and when you should do them as well as to give you insights on specific industries.
Starting Things Right – What does a good business plan look like?
This section should give you a general idea on what a business plan is and on how it should be written.
What is a good business plan?
A good business plan only needs to fulfill its purpose – in this case, getting approved for a loan. What helps are realistic and specific goals, clearly-defined work delineation, evidence, and research-supported assumptions/conclusions.
How do I write a business plan?
To write a business plan, you must first understand its most basic components: business concept, market analysis, and financial analysis. As you would be using it for a loan, it should also include how the loan would be utilized and be paid back.
How do you start a business plan?
You start a business plan with lots of research. Before you write a single word on your first draft, you should have some idea on what direction your business plan is taking.
What should a business plan include?
According to Forbes magazine, your business plan must include these ten things: executive summary, market opportunity, competitive analysis, a profile on the important players of the business, business model, past financial performance, financial projections, profit-and-loss statement, and balance sheet, cash flow statements, and break-even analysis.
How long is a business plan?
Most experts say it should be around 30 to 50 pages. However, for SBA, you can use whatever length necessary to completely explain and justify its purpose.
What are key success factors in a business plan?
There are four success factors in a business plan:
- Accurate – All the information you present there should be completely true as information would be the foundation of everything else that you would put in the business plan.
- Logical – Even your assumptions should be based on logic.
- Easy to understand – The people who would review your business plan may be able to follow what you are trying to say, but your job is to make it easy for them.
- Persuasive – You should be able to make the creditors see the value in your money-generating idea that will enable you to pay them back.
What should you avoid in a business plan?
Attempting to focus on too many objectives. Especially with applying for a loan, it should be clear in which objective would the funding be used on. Diffusing the funding on too many goals would appear to investors as not have enough impact on your business.
What supporting documents may be included in the business plan?
For every claim you make in the business plan, there should be a supporting document for it. For a loan, financial related documents would definitely be required as well as a letter of credibility. Your creditor would also need credit reports and quotes from contractors.
How to make a business plan look professional?
In looking professional, simplicity is key. The data in your business plan should be organized, there should be no grammatical errors on it, and even the paper you printed it on should be clean and crisp.
How to create a business strategy plan?
A business strategy plan works to transform goals into measurable project and programs as well as monitoring their success. Yours should be able to make you easily evaluate the results and determine the ‘weak link.’
How to write a business plan for a loan?
When applying for a loan, each section of your business plan should be as strong as the last because you have to prove to them that you would be able to pay them back.
How to present a business plan?
Provided that your business plan is sufficient, you should still think of all the objections that your creditors can think of and how you would address them. Display the accuracy of your business plan by relating your answer to something you have written in your business plan.
What to include in a business plan PowerPoint?
While the written business plan is written first introducing the company before going deeper, the PowerPoint version is a little different. To keep their attention, you should arouse their curiosity early on by introducing a problem and presenting your business as the solution. From there, elaborate but never bore.
How to present a business plan to a bank?
When presenting your business plan to the bank, you should highlight the desirability of your offer and how their loan would make it possible. Detail your financial plan, ensuring that your estimates and assumptions are always reasonable.
Should a business plan be written in future tense?
Follow the basic rules on tenses. If you are talking about projections or trends, then yes. However, when talking about how much you earned last quarter, then no.
Different Types of Business Plan
There is more than one type of business plan, each with the largest impact when used in a specific way.
What are the types of business plan?
Start-up business plan, internal business plan, strategic business plan, feasibility business plan, operations business plan, and growth business plan. In applying for a business loan, the growth business and the start-up business plans may be used.
How to make a 90-day business plan?
Essentially, this is just like your regular business plan, only at a smaller scale. A 90-day business plan is relevant for sudden and smaller financial needs which require immediate funding.
What is a sustainable business plan?
A sustainable business plan is an assessment of future actions, risks, and impacts your business will have to the environment and you can control it. This may not be necessary when you’re applying for a loan, but certain environmental regulations may require you to create one.
Parts of the Business Plan
There are different parts of a business plan, all of which should support your main points. In this section, you learn more about them and how you can effectively write them.
How to write an executive summary for a business plan?
Although it’s at the beginning of your business plan, it’s actually written last. It should state ‘who’ your business is, what it offers and what demand it takes care of, its target market, the purpose of the business plan, some data on your sales or projected sales, as well as other info that might help you get a loan.
How to write an industry analysis in a business plan?
The industry analysis should contain specific information about the industry in relation to your business and your offer, showing the growth potential for you based on the information. This will include a lot of statistics as well as your own research on your target market.
How to market research for a business plan?
First, what do you need to know about your target market? If you have the budget, find out as much as you can on those questions. If you don’t, develop surveys or questionnaires prioritizing information that would yield the best benefit for your business.
What is a business plan infographic?
A business plan infographic allows your audience to take in the most important information on your business plan through a more palatable medium: graphics. Just make sure that the design you use suits the tone and the brand of your business.
How to write a business plan quick reference guide?
This quick reference guide is exactly what the executive summary is. Thus, write it as an executive summary instead.
How to write a marketing plan in a business plan?
Your marketing plan should explain your research (why you preferred this method instead of the other and the information you got), your strategy (what your goals are, your distribution and marketing channels, developing your brand voice, etc), and your measurement methods (how you would measure your success and how you determined your metrics).
What is financial plan in a business plan?
A financial plan would make or break your business idea and is divided into two: the sunk costs (startup costs like business registration, inventory, down payments, etc.) and variable costs (utilities, raw materials, salaries, etc.). From a series of calculations, it would determine the viability of your plan.
What are industry trends in a business plan?
Industry trends are predictions from a series of statistics and trends about consumer behavior, technological advancements, employment, and the likes. Following the ‘Five Forces’ model, you can spot an industry trend from
- Bargaining power of buyers
- Bargaining power of sellers
- Threat of substitutes
- Threat of new entrants
- Rivalry among competitors
What is market opportunity in a business plan?
Market opportunity is a problem or a need or want a lot of people have that you can capitalize on. In a business, this is usually the basis of their product or service.
How to set up a business budget plan?
Before setting up your business budget plan, you should first review previous profit and loss statements. From there, you can make a list of everything you predict to spend on, as modified depending on your business net income/loss. For tax purposes and for better accuracy, it is best if an accountant does it for you.
What is exit strategy in a business plan?
An exit strategy defines how you or your investors can leave the business. In the case of a loan, the bank’s exit strategy is what their recourse is if you can’t repay your loan.
What is cash required in a business plan?
Cash required is how much your business needs in its account when it starts. Basically, it covers all your startup costs.
How to make a balance sheet for a business plan?
To create a balance sheet, you first need to understand this equation: equity = assets – liabilities. Just list all your assets then your liabilities and equity. When you subtract assets from all your liabilities and equity, the equation should balance.
What is a company description in a business plan?
A company description should define the scope of the business idea. It is an overview of the key aspects of your business.
What is a SWOT analysis in a business plan?
From its name, SWOT analysis is a feasibility tool that lists the strengths, weaknesses, opportunities, and threats to your business. It allows you to easily address the weaknesses and threats while also capitalizing on strengths and opportunities.
Where does SWOT analysis go in a business plan?
SWOT analysis goes into the marketing plan. It is an efficient tool in explaining the different dimensions of the information you obtained from your market and from the industry in very straightforward terms.
Business Plans in Different Industries
While there is a general guide on how you should make a business plan, you may benefit from a slightly different approach if you belong in certain industries.
How to write a restaurant business plan?
The restaurant business is very competitive, so you have to make extra efforts to prove that yours would be a success. Aside from the more basic parts of the business plan, you should also include the concept, marketing, and publicity, as well as the specialists and consultants you plan to hire.
How to write a nonprofit business plan?
While exhibiting the sustainability of the business and efficient use of funding as well, a nonprofit business plan should highlight its functions as a charitable organization. What is your guiding philosophy? Include also how it will deliver its services and how these services will impact the community.
How to start a cyber cafe business plan?
In some ways, a cyber café follows a perfect market model – meaning, everyone has the same leverage. However, for your business plan, you can’t bank on that. Do you offer drinks to your customers? Do you have specialized gaming equipment? Focus on what makes yours unique.
How to write a business plan for a fast food restaurant?
With a fast food restaurant, most of the legwork has been done for you already as the corporation already takes care of marketing and branding. So, the success of your business plan would rely on your financial plan. Prove the viability of your franchise with raw numbers.
How to start a salon business plan?
Like the restaurant business, a salon business is overly competitive. So, all things held equal, your success will rely on branding and on location. Bank on those when writing your business plan.
How to make an e-commerce business plan?
You can consider your general business plan as an outline but with a heavier focus on marketing and distribution channels. As everything is done online, the success of your business depends on how well you can attract people there.
Other questions on business plans
Aside from the content itself, there are still many questions in relation to business plans. And here, we answer any lingering questions you might have about the subject.
How much does it cost to write a business plan?
Business plan analysts charge based on their reputation in the field as well as their experience. However, most of them charge around $200 to $1,000.
Why is a business plan important?
A business plan allows you to identify and track your objectives as well as trace causes of failures, to make sound decisions, and to raise money for your business.
What must an entrepreneur do after creating a business plan?
After making your business plan, the next step is using it when applying for a loan to get the financial capital you need. Moreover, it can also be used to determine later on how well you are utilizing the funding later on.
Do you need a business plan for a nonprofit?
Aside from applying for a loan, a nonprofit can also use the business plan to attract major donors and recruiting board members. Most importantly, as a charity, a business plan would help a nonprofit keep true to its mission.
Do I need a business plan to start a business?
Yes. Even if you don’t need any external funding, a business plan can serve as a checklist of sorts on how well you’re doing.
What does a business planning analyst do?
Aside from implementing and proposing solutions, a business planning analyst knows everything there is to know about the company. The end goal of all its sub-tasks, of course, is to advance the organizational goal.
Jason is a Senior Author for SBL. He has been working with small business owners like you for the past ten years. He graduated with an MBA and began a career as an independent financial consultant for small businesses in his state.