Lenders base their small-business loan decisions on many factors, and each lender can weight these factors differently. A good business plan is always one of a lender’s highest priorities when considering whether to offer a loan, so creating the most impressive plan should be a priority for all entrepreneurs.
“The best way to improve your chances of obtaining a loan is to prepare a written loan proposal or business plan,” states Alan Haut in an article for the U.S. Small Business Administration website. “Lenders look to a loan proposal as evidence that your business has strong management, experience and a thorough understanding of the marketplace.”
If you want the lender to decide that the evidence looks good, you have to consider that lender’s priorities and highlight the factors that most strongly demonstrate your ability to repay the loan. Look at your plan through the lender’s eyes to find potential risk factors, and attempt to reduce or eliminate them before seeking a loan. If these risk factors can’t be reduced, gather substantial evidence that shows how you plan to overcome them.
In order to identify the risks that lenders watch out for, first consider the industry you will operate within. If it is a very risky industry, focus on expressing the unique advantages that your business will have, giving it the edge it needs to succeed where others have not. A great way to do this is to thoroughly describe prior experience and success you’ve had in a similar business. If you don’t have that experience, you may want to seek a business partner who does.
Then consider the financial aspects that form the foundation of your business, including whether or not you have any debt or other liabilities and how much savings and equity you have. In addition to a strong foundation, you need to think carefully about the future.
“Will you be able to overcome changes in the economy?” asks Fan Bi, a contributor to Entrepreneur.com and CEO of the award-winning custom menswear brand Blank Label. “Do you have a model that can sustain growth?”
Lenders view personal financial investment as a sign that you are committed to making the business work. It also proves that you have been successful enough to either save the money over time or obtain it in another manner, such as by convincing friends or family members of your business plan’s merit. Having your own financial resources also lets lenders know that you have options for repayment if your business fails or experiences a slow start.
If your business plan doesn’t excel in these ways, don’t worry. Most business plans have shortcomings in several areas, which they can make up for by crafting a thoughtful and thorough loan application.
“After all, if you’re in a great industry, [you] have a perfect plan, and [you] have plenty of business and personal capital, you may not need a loan in the first place,” states Bi.
In your loan application, make sure to include a concise, direct cover letter or executive summary to make a good first impression before launching into your business plan. Also, include personal financial statements for yourself and any other owners, along with several years of past tax returns.
If you are already running a business, provide financial statements for at least the past three years; otherwise, you can provide projected balance sheets and an income statement. All applications should include projected income and cash flow statements, along with information on how you will overcome any obstacles that could cause you to miss your projections.
For detailed information on creating your business plan, see the SBA’s guide at https://www.sba.gov/starting-business/write-your-business-plan.
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