If a business owner requires funding to expand their business, they must know the importance of writing a solid business plan before they apply for a Business Loan. Although a formal business plan is not mandatory for a small, unsecured SME loan, it is a powerful tool that gives lending institutions an idea of the business nature, goals, and the owner’s plan to achieve them.
Before approving a Business Loan, lending institutions want to ensure the business idea is sustainable and viable. For that, they look at various aspects, including sales strategies, financial statements, projections, and a complete financial plan. Moreover, loan providers also want to see the company’s products, experience, competitive landscape, key personnel, etc. They use this information to gauge a company’s chances of success, ultimately determining its loan repayment capacity. Let’s look at a few reasons a business plan matters before applying for a Business Loan.
- Helps Make Crucial Business Decisions
Running a business is an endless exercise of making decisions and managing a crisis. A business plan helps entrepreneurs make better business-related decisions. It allows the firm owner to answer some key questions ahead of time, like product distribution, marketing strategy, etc. After contemplating their core strategies, they can understand the impact of their decisions on the business goals and take better action. That is why lending institutions feel more confident in lending to entrepreneurs with a clear business plan.
- Irons Out the Kinks
While creating a business plan, entrepreneurs ask themselves several important questions and take time to research and find insightful answers. It helps articulate the owner’s vision in practical terms and identify gaps in the business strategy to work towards improving them.
- Avoids Big Mistakes
According to data, only about 50% of small businesses are able to celebrate their fifth anniversary. While there are many reasons for failure, a business plan can address most of them purposefully. The most common reasons for start-up failures include lack of product demand in the market, lack of capital, inadequate teams, stiff competition, too high or too low pricing, etc. Entrepreneurs can avoid these mistakes while creating a business plan and sustaining their business to ensure timely loan repayment.
- Proves Business Viability
Many budding entrepreneurs create businesses out of passion. While passion is an excellent motivator, lending institutions do not see it as a valid proof point. Planning out the steps to turn a vision into business success is the most crucial strategy between idea and reality. A business plan confirms to Business Loan providers that the applicant has a grand business idea that makes good sense.
For instance, market research is a critical component of a business plan. It offers insight into the chosen industry, competitors, and target customers. It enlightens entrepreneurs while running a business and informs them about activities like advertising, product launches, marketing, etc.
- Sets and Communicates Better Benchmarks and Objectives
A business plan brings logic to the objectives, with good reason and rhyme behind them. It helps make the benchmarks more consequential and intentional while keeping the entrepreneur accountable to their strategy and long-term vision.
Once these benchmarks and objectives are set, the time comes to make important decisions. A business plan works like a teacher, answering all questions and clearing doubts. Sharing the business plan with the team members also ensures that they are aligned with the company’s long-term objectives. With deep insight into their strategy and progress, they can better handle their financial and debt management.
- Guides Service Providers
Business owners often employ freelancers, contractors, and other experts to manage tasks like marketing, accounting, consulting, legal assistance, etc. Those with a business plan can easily share their business protocols and compliance requirements with these service providers and ensure each team member stays on the same page.
- Helps Understand the Broader Landscape
A business cannot operate alone on a remote island. It needs a market terrain to fulfil its demand and supply chain. A business plan helps them understand the competition, identify consumer preferences and trends, and illuminate potential disruptions to work broadly.
- Reduces Risk
Running a business involves risk, but it becomes more manageable with a well-crafted business plan. A clear idea of the expenses and revenue projections helps devise logistics and change operational intends to understand the competitive and market landscape. It eventually reduces the risk by assisting entrepreneurs to make better decisions based on figures and foresee the future for the company’s success.
- Helps Secure Financing
Companies with a comprehensive business plan are 2.5 times likelier to gain the required funding. Whether the entrepreneurs pitch to venture capitalists, apply for a Business Loan online, or plan to sell their company in the future, a business plan can help them get better funding in time. After all, anyone putting their money into a company will want to know its viability in the long run. Therefore, the business plan is the most effective way to prove that the applicant is serious towards their business and can manage their finances effectively.
What Loan Providers Look for in a Business Plan?
Lending institutions typically look for the following five things in a business plan:
- Business Character: Includes intangible qualities like competence, determination and honesty based on the applicant’s business and personal credit history, financial records, recommendation letters, etc.
- Repayment Capacity: Includes the borrowers’ repayment capacity based on their financial history, past revenue and profits, financial projections, etc.
- Capital: Includes the company’s capital requirement and repayment plan based on financial statements, investments, and financial resources.
- Market Conditions: Includes current market conditions and business strategies to face challenges.
- Collateral: Lending institutions often want to see something of value, such as property, inventory, equipment, and receivables. Although SME loans are collateral-free, borrowers with sufficient assets have higher chances of repaying the loan rather than defaulting.
Considering the various reasons why a business plan is so crucial to apply for a Business Loan, spend some time building a realistic and detailed business plan to impress loan companies. It’s never too late to create a business plan and secure the required funding by assuring lending institutions of timely repayment.