10 Tips for What a Lender Looks for in a Business Plan

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Are you ready to turn your inspirational business vision into action? Once you spot an opportunity that you simply can’t pass up, there are calculated steps to turn your vision into reality, and finding financing is usually at the top of the list. Whether you need to borrow $5,000, $50,000, or $500,000, the tips in this article will help you understand what a lender looks for in a business plan.

Tip 1: Third Party Review

Before you start looking around for a lender, you need to write a business plan, and you need to have it reviewed by a business advisor or a mentor, such as Small Business BC. As an independent third party, they will help you focus on areas that are most important to a lender. Warning: these may not be areas that you’re most interested in! As an entrepreneur, you probably have a high tolerance for risk. But most lenders are the opposite. They love numbers, figures, and concrete research that show business viability.

Tip 2: Be Clear About What You are Selling

Your marketing plan needs to show the lender that you’re clear about what you’re selling, who’s going to buy it and why and how you’re going to reach those buyers. Explain what you’re selling in plain English. This may seem obvious, but a lot of plans leave lenders guessing what the product or service being sold is, or why anyone would buy it.

Tip 3: Explain About the ‘Who’

Tell the lender about the ’who‘: Who your customers will be, how much they’ll spend, and why they’ll buy from you. Tell the lender who your suppliers are, and if you have signed contracts or letters of intent to purchase. Who are your main competitors? And what makes your business different or better than theirs? Present your prospective lenders with a fresh take on a tired industry, and you will grab their attention.

Tip 4: Know Your Industry

Convince the lender that you really know your industry. You need to prove that there’s a demand for your product or service, so be sure to show that you’ve researched and understand the key trends in your industry.

Tip 5: Know How Much Money You Need

This may seem obvious, but know how much you need, versus how much you want; there is a difference. And, for what purpose?

For example, are you purchasing equipment or are you managing cash flow?  Tell the lender how you plan to repay the loan. You need to show how you plan to generate enough revenue to cover your operating expenses plus pay the lender back.

Tip 6: Identify Your Assumptions

Clearly identify all the assumptions in your business plan. Assumptions 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 need to demonstrate that you’ve thought about all the little details.

Tip 7: Show Your Own Investment

Lenders want to see that you have enough confidence in your success to risk your own money before they’ll risk their members’ or shareholders’ money.  And most lenders will want to see your investment (or equity) of at least 10% of what you need in your financial projections.

Tip 8: Cash Flow, Cash Flow, Cash Flow

Over 90% of declined loan applications are declined because the cash flow projections don’t convince the lender that the business will make enough to repay the loan. Lenders need to see that your assumptions are supported by concrete evidence from the industry, your own past sales, or even your competition’s sales, if you can get those.

So, why is the tip “cash flow, cash flow, cash flow”? Because lenders want to see not one, not two, but three cash flow scenarios: one with conservative sales, one with realistic sales, and one with aggressive projections.

Tip 9: Demonstrate Your Team’s Qualifications

When a lender looks at the operations plan for your business, he or she wants to see proof that your management team will be able to run a successful and profitable business. Who’s running the show? Your operations plan is all about naming names. Tell the lender who’ll be doing what in your business, and what are their qualifications and track records.

Tip 10: Disaster Planning

Give your worst case scenarios, or what I like to call, “Disaster Planning”. It might sound strange, but you have to tell the lender how you’re going to handle the risk that no one will buy your product or service. A lender needs to see a contingency plan of how you would pay back the loan if your sales don’t meet expectations or if your expenses are higher than anticipated.  A well-developed and thoughtful business plan shows that you’ve thought through different scenarios and changing circumstances, which will give the lender significant confidence in your operations.

After digesting all of these tips, consider this last (and most important) piece of advice: Quite simply, the most effective business plans are ones that convey that  you want to make some money and have a good time while doing something you love.

Get Started on your business plan by downloading Small Business BC’s Business Plan Template and Cashflow Forecasting Tool.

Download Now