Business Tips

Why Do I Have to Write a Business Plan?

This is a comment I hear nearly every day. It usually comes from an individual that has been to a lending institution looking to borrow money to start a business. The first question any seasoned loan officer should ask when approached for a commercial loan would be to view the formal business plan. They aren’t doing this to be difficult. If you don’t have a plan, you aren’t ready. It’s essential to establish credibility with a lender, or as we like to say, “show them that you’re dangerous”.

To get the attention of a lender, especially for a start up business, can be difficult. Bankers get inquires every day from people looking for loans. This puts a high premium on their time. And for those of you that think banker’s hours are from 9-5, think again. To get a loan you must compete with lots of other projects. If you haven’t written a formal plan, you aren’t dangerous and your project probably won’t be taken seriously.

So why do you write a plan? It isn’t just for the bank; it’s about feasibility and risk. Putting together a comprehensive business plan requires you to think full circle around the project. Why would anyone want to quit a job with salary and employee benefits and invest time and money in a new business without considering all the angles? Consider that only 25% of new businesses make it to their fifth anniversary. That means three out of every four people approaching their friendly neighborhood banker for money will turn out to be bad loans. It is no wonder a lender wants to see that you are prepared for the challenges to come. Please, write the plan to help YOU mitigate some of the risk of opening a small business.

Let me detail the information that should be included in each plan. First, discuss the current trends in the industry you are considering. Is it on an up swing or declining? Will you have technology challenges coming your way? What can the average small business in this industry expect in the way of annual sales and profits? What skills, education, or industry experience do you have that demonstrate your ability to successfully operate this business long term? Next, consider the local market. Is this product or service desired by the community? Will they pay a price high enough to allow you to be profitable? What are the demographics of your client base? Are there a sufficient number of these clients in your trade area? Now, think about the competition. Do competitors exist in your trade area? What about wholesalers, big box stores, catalogs, or the Internet? How will you be unique among your competitors? Will your business be home-based, on line, or are you planning a brick and mortar location? Will this location allow room for growth? Will you lease, purchase, or build? How many employees will you need? Where will you get them? What skill sets will be required? How will you market your products and services?

Another important consideration for any business plan is to list project costs. You need to be very detailed here. Itemize everything and use precise costs. Know what vendors you will use, equipment model numbers and costs, warranty charges, installation costs, and shipping fees. The last and probably the most important for your lender is a two year cash flow projection. This will allow the lender to see how you will put the loan proceeds into action to enable you to generate sufficient cash flow to pay the expenses of the business. This includes your salary and the loan payment to the bank. Understand that cash flow projections can be manipulated to justify nearly any loan. Be conservative and realistic. Purposely inflating your cash flow picture is like cheating yourself in Solitaire and any
experienced lender will see right through it. So, be dangerous. Do your homework. Put together a great road map of where the business will take you. Let the risk takers stay in Vegas.