As a small business lender, Excelsior Growth Fund has “insider” knowledge about what lenders really look for in business plans. Ensuring that your plan includes the key points outlined in this article will help lenders better understand your business and your funding needs.
Every business needs a plan. While they’re critical during the startup phase, they’re just as essential during growth periods to keep leadership focused. Down the road, your business plan can provide a framework for decisions on expansion opportunities and to help you re-focus efforts to align with your mission. They’re also required for small business lending from reputable lenders, including Small Business Administration (SBA)-backed loans.
Lender’s perspective: Business Plan Narrative
To be effective, there are some essential elements that you must include in your plan’s narrative. From a lender’s perspective, here’s what they’ll want to see:
- Business purpose: What does your business do? Include a simple, straightforward description of the fundamentals of your business. In one to two sentences, the lender should be able to learn how your business does or will make money.
- Operational plan: Provide an overview of day-to-day operations, as well as who on the team is responsible for each area including financial management, sales, marketing and human resources. Be sure to answer key questions such as:
- Who are your key suppliers?
- What are some key products/services that serve as core revenue streams?
- If you’re carrying inventory, where is it stored, and how exactly is it shipped to customers?
- Are you paid immediately upon delivery of products or services, or do you bill on 30-, 60- or 90-day terms?
- The Business Owner: Potential lenders want to have confidence in your ability as the owner ability to run your business successfully. Tell them about your relevant expertise and include your resume in your plan’s appendices (the section at the end of your plan that includes more detailed information). Do you have industry experience? Do you have a financial background? Lenders want to see that you know your market, so if you have prior industry experience, be sure to highlight it. If there are gaps in the ownership team’s background knowledge, who will be hired to fill those gaps?
- Financing: In addition to financial projections (the next section), provide a brief narrative section on how you’ll fund your business until it becomes self-supporting. What is your financial contribution? Where will you get the rest of the funds needed? What will the loan be used for, and specifically, how will that help the business grow? Lenders want to see details and evidence of a thoughtful growth plan in your answer to this question. A generic response such as, “I want $100,000 to hire people and grow the business,” isn’t enough. Instead, dig into the details of how the loan will specifically contribute to your plans for growth. For example, “I want to buy a higher-capacity printer that costs $50,000 so that I can raise my pamphlet-printing business’s weekly production runs to increase revenue.”
- Industry analysis: Lenders like to work with industries that have growth potential. What’s the demand for your goods or services and how do you plan to meet that demand? What factors could impact your growth potential? How do you plan to leverage opportunities or overcome challenges?
- Competitive research: Talk about businesses within your industry that are similar to yours, and what makes yours different or better. Perhaps you offer new products or services, or maybe you’ve developed a more cost-effective way to produce your products. Are you marketing your brand as a luxury product or service? If you have a brick-and-mortar location, are you the first to bring an existing product or service to your geographic market? Everyone has competitors, so be clear about yours. (If you haven’t yet read Blue Ocean Strategy, EGF recommends it to help you develop your strategy).
- SWOT analysis: When you include a SWOT analysis—strengths, weaknesses, opportunities and threats—you demonstrate that you understand your business and industry, as well as its challenges, and are prepared to meet them. There are many good examples and templates for SWOT analyses available online.
- Marketing plans: It’s never enough to hope that news of your business will spread via word-of-mouth—potential lenders want to see how you’ll get and keep your customers. It’s also not sufficient to say that your target market is “everyone.” Even if that’s your ultimate goal, who is most likely to buy your products or services first? Specifically identify your target market as well as how you’re going to reach that audience. What do you know about them? How do your products or services align with their needs? Where do they shop and what are their buying habits (or how do they use your services)? Keep in mind that your marketing plan doesn’t have to be expensive to implement, but it must effectively reach your target clients.
Lender’s perspective: Financials
While it’s a common practice to lead with the narrative portion of your business plan, when lenders review plans they typically focus on the financials first. Then they’ll reference the narrative to gain a sense of how these assumptions are supported by the written plan. You can put your best foot forward by creating a great cash flow forecast. Here are some tips to get started:
- Lenders understand that your projections are exactly that: assumptions that you’re making about revenues and expenses based on your best estimates. Most won’t challenge your projections if they appear credible and reflect what you say you’ll do in the narrative.
- Lenders don’t expect startups to be profitable right away, so be realistic and somewhat conservative in your projections. Include a ramp-up period to demonstrate that you’re realistic and have planned for likely cash-flow shortages early on. It’s also okay to also include a best-case scenario and show that you’re aiming high.
- Rather than roll revenue items into a single line item, provide revenue details on the types of products and services you plan to offer. To the extent that it makes sense for your business, revenue projections should include broad categories by types of products and services or by market segments.
- Lenders will review common financial ratios for your industry and how your projections compare. You can get this information for free from your local Small Business Development Center or local business library. If your assumptions skew either stronger or weaker than industry standards, address that with good supporting information.
- One of the hardest parts of this process is projecting working capital needs during ramp-up periods, but good advisors or lenders can help. With this projection, be sure to also provide accurate estimates for hard costs such as equipment and inventory, as well as soft costs, which include deposits and professional fees.
- Finding the optimal ratio of your own financial contribution and funds lent by others is essential to your business’s survival in the early years. A lender will know you’re on the right track when your projected annual cash flow exceeds your projected annual debt service.
*If you want to brush up on lending lingo before you apply for a business loan, see our guide on common lending terminology.
Lender’s perspective: Executive summary
An executive summary that highlights the key points from each section of your plan is usually the last thing that you’ll create, although it’s typically the first page (or two) of your plan presentation. Narrow this down to only the key information, with detailed information in the rest of the plan and in the appendices.
Create a plan that you and your lenders will love
By the end of reading your business plans, a lender should know how your business will become and stay profitable. More than anything, you want to create a business plan that’s useful in your day-to-day operations and strategic planning—but if you also create one that lenders love, you’ll demonstrate that you’re knowledgeable, competent, and informed about your industry and prepared for the ups-and-downs of business ownership.