Business Planning to get a Loan

Using a Business Plan to get a Loan

A good business plan is one of the most valuable tools a small business has when seeking outside financing. A business plan is required by banks for most types of loans, and the Small Business Administration will not guarantee long-term loans without one.

From the borrower's point of view, the purpose of the business plan is to sell the lender on the business, the business owner or owners, and the product or service produced by the business. Like a good newspaper article, the business plan answers the basic questions: Who?, What?, Why?, Where?, When? and How? It is a synopsis of the business owner's objectives for the business and how to get there.

The lender looks to the business plan for information needed to evaluate the loan request. Lenders want to know what the money will be used for and a detailed description of how the loan will be repaid. In evaluating a loan request, lenders look to so-called Five C's character, cash flow, collateral, capital, and conditions.

Character

Lenders prefer to lend to borrowers who are upstanding members of the community and who have demonstrated a track record of honesty and integrity in their business and personal lives. The experience and expertise of owners and key managers of the business are important. If the owner and management of the company can demonstrate that they have the ability to run a successful business in the industry in which they operate, the lender is more likely to approve the loan.

Cash Flow

Will the company generate enough cash flow to repay the loan with interest on time? Are the company's projections or cash flow realistic? What happens if the cash flow fails to meet expectations?

Collateral

What is pledged as collateral to protect the lender in the event of default? Generally, the lender takes a lien on the property purchased with the loan, and additional collateral may be required. Personal guarantees by the business owner and principles are also required, especially with SBA-guaranteed loans.

Capital

Generally, the entrepreneur must have personal funds invested in the business. Either the business or the business owner must provide a certain percentage of the funds (usually 20 to 30 percent) needed for the purchase being financed.

Conditions

The lender also looks at general economic conditions and the conditions in the borrower's industry. A healthy economy and growing industry can improve the chances that the loan will be approved.




The American Bankers Association recommends that a business seeking a loan be able to answer the following questions. All of these should be addressed in the business plan: