A business plan should convince lenders. When you write one, you assume it will do that. But if you have gone the typical route—using an online resource to develop a business plan—you may not have a plan that will help you raise capital.
“The operational business plan is great for startups, but when it comes to getting capital, you have to think with the mindset of the lender that you’re going to be sharing this with,” said Norm Bour, a partner at Opis Network Inc., a consultancy that helps businesses at all stages. You can use a template or workshop such as those at SCORE1 or the U.S. Small Business Administration2 to get your thoughts together, he said, but you need to take that business plan to the next level if you want to use it to get funding.
Bour said you’ll increase your chances of getting a business loan if you pay attention to what some top lenders told him were the chief reasons they turned down business-loan requests.
1. Pro forma figures that don’t compute. If you’re looking for money for a restaurant, for instance, and you think you’ll do $500,000 in business each month, no bank will take you seriously if you can’t work through the numbers not just forward but also backward. How many days will you be open? How many tables will you have? How frequently will the tables turn over? Your pro forma figures (I’m going to do X number of dollars of business per day times the number of days per month you’re open) must take into account factors on your restaurant’s capacity, and the numbers need to work out. Some business plans that Bour has seen for startup restaurants couldn’t possibly make the projected profits without four times as many tables.
“This is the biggest failure, and the reason that most business loans are declined,” he said.
Someone who wants to expand an existing business makes a similar error when he doesn’t show the details of how he expects to get from, say, $500,000 in gross revenues to $1 million in just a year, all because of the expected loan. Exactly how will that money translate into new revenue?
“Don’t just share the what—share the how,” Bour wrote in an article, “The 7 Steps to Creating a Fundable Business Loan.”3
2. Inexperienced management team. Many people start businesses because they are good at certain things—fixing cars, for instance. As Michael Gerber pointed out in “The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About it,” the reason some small-business owners fail is that they are not businesspeople. They are technicians. They open businesses and keep doing what they know how to do (fix cars), ignoring such essentials as setting goals, benchmarking, and understanding the financial ends of their enterprises. A lender will look at a business plan for references to who will help an entrepreneur keep his business running. In your business plan, cite your team members’ qualifications and prepare job descriptions for the major players you plan to hire.
3. No skin in the game. If you’re looking for capital, you should already have an amount of your own money, equal to or greater than the amount you’re seeking, invested in your business.
“One of the biggest errors that businesses make is they expect to get virtually 100 percent of their operating capital. … They go out looking for operating capital and don’t have anything significant invested in the business,” said Bour. “Bankers don’t like that. Bankers want to see that the potential borrower has a vested interest.”
4. Muddy thinking or evasive answers. When the lender asks you how much money you need, she wants a well-thought-out answer. Don’t say, “I think I need X,” or, “I need between X and Y.”
In addition, be specific about the purpose of the loan. “For working capital” is not specific enough.
In his article, Bour advised business owners to spell it out like this:
“I need $75,000 for working capital to support three months of expenses while the business is growing, and then another $125,000 for equipment that consists of $50,000 for a computer system [six computers plus software and server], and $75,000 for XYZ New and Improved Machine.”
Bour added that if you have bids or proposals, you should include them with your loan request.
“They will strengthen the package and support the facts behind it,” he wrote.
To avoid the bloopers outlined above, visit a bank or lender that specializes in business loans, such as The Small Business Authority.
Also, tell the lender why you need the loan and how you got into your current situation.
“The lenders have seen it all before and if you are in a bind due to X, Y, or Z, they want to know: How did this happen? Was it within your control? Were you a victim of circumstances?” Bour wrote.
Be prepared to specify what collateral you and your team have that can be injected into the business to act as a safety net. Along with your business plan, you’ll need copies of business and personal tax returns, usually two years’ worth, with all schedules. Voluntarily supply your credit report as well. Be upfront about your credit history.
Your business plan will be the major method of establishing credibility with the bank. Take your time writing a plan that shows that you run a solid business, and that shows that you will use the loan responsibly to grow your business.
For more information, visit:
1. SCORE: “Developing a Business Plan”
2. U.S. Small Business Administration: “Starting a Business”
3. “The 7 Steps to Creating a Fundable Business Loan”