If you are seeking help on how to create a business plan to obtain funding from a bank there are a few critical things you need to know. Contrary to public belief banks continue to lend to small businesses. The only difference now is that the lending criterion has tightened significantly following the global financial crisis and the need for a clear concise business plan remains absolutely critical.
When thinking about how to create a business plan for banks it is important to remember that the bank only care about two things:
- Will they be repaid?
- Can the loan be serviced?
In answering these questions it is only natural to think that the emphasis will be on the financial section of the business plan. While this is true to some extent, in order to produce financial projections that will ultimately alleviate these concerns it is important to focus on the key risk factors in your business model and explain clearly how they will be mitigated.
Banks are driven by credit risk and they use business plans to evaluate the level of credit risk in business proposals. What do we mean by credit risk? Well, put simply, it is the term they use to describe the probability of default i.e. how likely it is that they won’t get their money back! This also dovetails in with the ability to service the interest payments. While this is a quantitative measure it is heavily dependent on the qualitative analysis in your business plan and is driven by factors such as:
- Market and customer analysis
- The uniqueness of your product offering
- Competitive landscape
- Management team
- Having a business action plan
What To Focus On
Banks are also heavily influenced by “risk appetite”. This is a term banks use to measure how much tolerance they have for certain sectors of small business. Banks run their business like a portfolio and as such weight the portfolio, in terms of level of investment, based on the risk v return. This is why it is important when learning how to create a business plan for a bank to focus on the pressure points in the headings above.
Now, you will have no idea of what the banks tolerance to certain sectors are because they are a moving target and vary from bank to bank. It is therefore imperative that you explain in detail your market characteristics in terms size, profitability and forward-looking trends to demonstrate the potential opportunity. It is equally important to define your target customer and their buying behaviours in terms of price sensitivity and frequency to describe what they want, rather than what you think they need. This will compliment the sales and marketing strategy employed by you business.
Unique Selling Point of the Product
Uniqueness is equally critical when thinking about how to create a business plan that will be palatable to banks. When discussing your product offering concentrate on what is unique about it and how it solves the problem your target customers have. Even if you offer a generic product try and identify something about your business model that provides uniqueness. That could be in the way it’s delivered or after service or maybe even a culmination of your overall offering that adds value.
One of the key factors when considering how to create a business plan for banks is to demonstrate and keen understanding of the competition. Given a large percentage of businesses fail in the first two years banks are extremely interested in the level of competition you will be faced with and more importantly, how you plan to compete. It is imperative when you create a business plan to outline the relative strengths and weaknesses of the competition and highlight where you think the opportunities lie. This forms the basis of your business strategy and will hone your overall business model.
Banks are will also expect a statement on why you and your team are qualified to run the business and execute the business strategy. Anyone can pay for a business plan to be written for them so banks want to know that there is adequate experience and technical expertise in the management team to lead the business to success. This does not mean you have to append a six page CV. Quite the opposite in fact. A short statement on each key team member summarising experience and qualifications is more than enough. You can always provide a more details management statement if the bank requests it.
Business Action Plan
This is a key component to include when thinking about how to create a business plan for bank funding. As we indicated earlier, banks want to know how they will be repaid and when. In order to answer this questions a specific, measurable plan must be devised. This means detailing a plan of business objectives and identifying the key events that must be accomplished for each business objective. The plan must attribute accountability to a team member, preferably a specialist outlined in the management statement, and also provide how much it will cost to meet the business objective and a definite timeframe around each milestone. Providing a clear measureable plan to accomplish the key objectives shows good management and also goes a long way to mitigating perceived risks in the business model.
What to Include In The Financials Section
All of the analysis above flows into your financial plan to support the assumptions that you use to generate projections. These are the forward-looking financial numbers in your business plan. When we advise our clients on how to create a business plan for bank funding we always focus on answering the two questions they most want answered. This involves using a financial model that focuses on cash flow because when you get write down to the bottom line it is cash that will repay debt and service it along the way. Profits are an accounting manifestation of financial performance and are wide open to manipulation – banks are only too aware of this.
When thinking of how to create a business plan for banks it is important that you have some analysis around working capital and cash flow in the business. Too many business plans show only a cursory overview of the cash flow and concentrate on sales forecasts. While this is important it doesn’t really provide banks with the data they need to make a credit assessment of your business plan. Working capital analysis (the use of cash in the business) is pivotal to answering that burning questions banks have – will the loan be serviced?
A good financial section will include the following:
- Quarterly Profit and Loss Statement (Sales Projections)
- Quarterly Balance sheet
- Monthly cash flow projection
- Working capital analysis (debtors days, creditors days)
- Interest cover ratio (how many times can free cash flow cover interest)
- Debt payback period (how long will it take to repay the loan)
- Gearing ratio (Debt to equity ratio)
Many business-planning resources do not provide adequate financial information to permit a proper assessment and this leads to entrepreneurs being unnecessarily rejected for funding. It is important for your business to use a three way cash flow model that monitors the income and expenditure (profit & Loss), the assets and liabilities (balance sheet) and the cash movements in the business (cash flow statement) throughout the year. So that a reliable picture can be presented not just for credit assessment but for managerial decision making.
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