Are you ready to bring your business idea to life? There are calculated steps to turn your vision into reality and sourcing financing is usually at the top of the list. Whether you need to borrow $5,000, $50,000, or $500,000, these ten tips will help you understand what a lender looks for in a business plan.
1. Third Party Review
Before you start looking for a lender, you need to write a business plan. Then, you should get it reviewed by a business advisor or mentor. As an independent third party, they’ll help you focus on the most important areas to a lender.
These may not be areas that you’re most interested in. As an entrepreneur, you probably have a high tolerance for risk, but lenders are the opposite. They want to see numbers, figures, and concrete research that show business viability. For help with this step, explore our Business Plan Services.
2. Be Clear About What You’re Selling
Your marketing plan needs to show the lender that you’re clear about what you’re selling, who will buy it, and how you’ll reach those buyers. Explain what you’re offering in plain language. This may seem obvious, but many business plans leave lenders guessing what the product or service being sold is, or why someone would buy it.
3. Explain the ‘Who’
Tell the lender about the ‘who.’ This includes who your customers will be, how much they’ll spend, and why they’ll buy from you. Explain who your suppliers are, and if you’ve signed contracts or letters of intent to purchase. Present who your main competitors are, and what sets you apart from them. Present your prospective lenders with a fresh take on a tired industry and you’ll grab their attention.
4. Know Your Industry
Convince the lender that you know your industry well. You need to prove that there’s a demand for your product or service, so be sure to demonstrate that you’ve done research and understand key industry trends.
5. Know How Much Money You Need
This may seem obvious, but there’s a difference between knowing how much you need, versus how much you want. For example, estimating how much funding you’ll need for new equipment may be simpler than figuring out how much you want to help manage cashflow.
You must then explain how you plan to repay the loan. You need to show the lender how you plan to generate enough revenue to cover your operating expenses and pay them back.
6. Identify Your Assumptions
Identify all the assumptions in your business plan. These are the details about your start-up costs, such as how much you’ll invest in marketing, or how much inventory you need to have on hand. Some may be estimates, but you must demonstrate that you’ve thought about all the little details.
7. Show Your Own Investment
Lenders want to see that you have enough confidence in your success to risk your own money before they risk their members’ or shareholders’ money. Most lenders will want to see your investment, or equity, of at least ten percent of what you need in your financial projections.
8. Cash Flow
Over 90 percent of loan applications are denied because the cash flow projections don’t convince the lender that the business will be able to repay the loan. Lenders need to see that your assumptions are supported by concrete evidence from the industry, your past sales, or even your competition’s sales, if available.
Lenders want to see three cash flow scenarios, one with conservative sales, one with realistic sales, and one with aggressive projections.
9. Demonstrate Your Team’s Qualifications
When a lender looks at your operations plan, they want to see proof that your management team will be able to run a successful and profitable business. So, who’s running the show? Your operations plan is all about naming names. Tell the lender who’ll be doing what in your business, as well as their qualifications and track record.
10. Disaster Planning
Present your worst-case scenarios. It might sound strange, but you must tell the lender how you’re going to handle the risk that no one buys your product or service. Lenders need to see a contingency plan if your sales don’t meet expectations, or if expenses are higher than anticipated. A well-developed and thoughtful business plan shows that you’ve considered different scenarios and circumstances, which will give the lender more confidence in your operations.
Looking for More Help?
After digesting all these tips, consider this last piece of advice: the most effective business plans convey that you want to make some money and have a good time doing something you love.
Get Started on your business plan by downloading Small Business BC’s Business Plan Template and Cashflow Forecasting Tool.
Small Business BC is Here to Help
SBBC is a non-profit resource centre for BC-based small businesses. Whatever your idea of success is, we’re here to provide holistic support and resources at every step of the journey. Check out our range of business webinars, on-demand E-Learning Education, our Talk to an Expert Advisories, or browse our business articles.