This post by Judy Emerson
Here at the NSBDC, I spend a lot of time talking with folks wanting to start a business, and one of the very first things we get into is the reason for having to write a business plan. One of the main reasons – “Because a lender REQUIRES one!” Out of that discussion generally comes several other questions, so I’ve put some together here to give you somewhat of an idea of what NOT to say to your lender! In this period of extremely tight lending, it’s important to be as prepared as possible before approaching a lender.
“What do you mean I need a business plan? I told you what I wanted to do with the money!”
The first time you borrow money from a financial institution, they will want a full business plan that includes a description of your product/service, your experience (and education), your market and how you intend to reach it, a list of your team (CPA, insurance rep, attorney, marketing consultant advisors, banker, etc), and your operating plan and future plans. Lenders need this information as well as your financial information to make informed decisions.
“You need monthly projections AND financials—I gave you annual projections and you have copies of my income tax returns. Isn’t that enough”?
Realistic monthly cash flow projections with detailed assumptions provide the lender with a better understanding of how you anticipate the money to “flow” through your business. Cash flow along with the Income Statements and Balance Sheets are important to lenders, as they will compare your anticipated revenues and expenses along with your historic financials with national standards for your industry. If your financials are considerably out of range with national statistics, then you will need to discuss it with them. Which brings up another point – do you know what your NAIC (North American Industry Classification) number is? You may have more than one depending upon your business, i.e. you may sell plumbing supplies retail and wholesale, AND provide service. Each of these will have a NAIC code of its own. If this is the case, talk with your CPA if you have questions regarding this.
“Why do I have to come up 25% (or 30% or more) in cash? I can buy a car with 10% or less down.”
Business loans are different than consumer loans. Once the lender has loaned your business money, unless it is collateralized by land and buildings, the lender has little chance of recovering the money in the event of a foreclosure. This is also why the bankers require those parties with 20% or more ownership of the company to personally guarantee the loan. The lenders want to know that the owners will make every effort possible to repay the bank and if they don’t, the lenders will then go after personal assets.
“My product (or service) is so great that I won’t have any problems selling it. AND my product is so exclusive that there isn’t any competition out there!”
Lenders know that there isn’t a product on the market that doesn’t have both direct and indirect competition. It is much better to realistically analyze your market, identify your competition and provide explanations as to how you can successfully compete. Lenders feel much more comfortable lending money to business owners who have real knowledge of their market and how they can compete in it.