Tips to create a good business plan

There will be a time when all small businesses require some additional cash for some reason or another, and when this time arrives most small business owners will have no option other than going to see an external financier for a loan. When a small business applies for funding there are certain things it must provide and a business plan is one of them. It makes no difference whether the owner goes to the bank or a private investor to get some additional funds, a financier will request a detailed plan of some kind.

The business plan is often the determining factor in whether the funding application is successful or not, therefore writing a good business plan for a loan application is very important, and something that many small business owners don’t seem to appreciate. Like everything in life, business plans can be good or bad, and it is the good plan that is more successful in securing the money needed as opposed to a poorly written plan. But what exactly is it that makes a good business plan for a loan application?

When writing a business plan for a small business some information is essential and must be included, regardless of the size of the business or the amount of finance required.

1) Brief outline of the business

Before lending a small business money a financier is going to want to know about the business, such as the location, how long the business has been in existence, who the key personnel are, the services the business provides or the products the business sells, the type of market the business operates in, the major customers and suppliers etc. When writing a good plan for a small business the opening paragraphs should note down the precise details of the business.

2) How much funding is needed

If you are a small business owner needing some finance one of the first things you need to know is exactly how much cash you need. A range, such as “between $50,000 and $100,000” is not good enough and you must provide an exact figure for the financier to work with.

Many small business owners intentionally omit the funding they need from their plans and prefer to leave it as a discussion point, which makes no sense at all. If you have to send the financier a copy of your plan prior to any meeting the financier will have no idea how much money the business needs, which is one of the fundamental questions. If the amount of funding is not in the business plan some financiers will simply throw the plan in the trash and not even consider lending the business money, so to make sure this doesn’t happen to your plan make sure you put in the level of funding required.

If you set an exact funding requirement and the financier turns it down you can always re-negotiate downwards and ask the financier the maximum amount they are prepared to lend is, which puts bats the proverbial ball back in the financier’s court. 

3) The purpose of the funding

If there is no exact purpose for the money a financier is highly unlikely to lend the business money, on the assumption it will be frittered away. When writing a good plan for a small business there should always be a paragraph describing exactly why the money is needed. If the money is needed for working capital, put it in the plan. If the money is needed to buy new equipment, put it in the plan. If the money is needed for a large marketing campaign, put it in the plan.

4) Evidence the business can repay the loan

Before lending small businesses money the financier is going to want to be comfortable that the business can afford to pay the loan back. The best way of demonstrating the business can repay the loan is to provide some financial information.

Historical financial statements and management accounts demonstrate the past performance of the business however past performance isn’t always a guide for future performance, and it is the future performance the financiers are going to be concerned with.  This doesn’t mean that historical information shouldn’t be included in the business plan though.

The easiest way to demonstrate that the business can repay the loan is to prepare a cash flow forecast. When preparing a cash flow forecast and you must ensure the projected figures are realistic, achievable and prepared based on strong underpinning assumptions.

In conclusion......

You have to remember that a financier is taking a risk when lending small businesses money and it is your job to demonstrate that lending your small business money is going to be low risk. You need to demonstrate the business runs efficiently and will continue to trade, you need to demonstrate what the  money is going to be used for and, most importantly you need to demonstrate you can repay the loan in the agreed timescale. The business plan is essential for demonstrating all of these points so you if you are seeking finance you need to ensure you have a good plan business plan for the loan application.

Many small business owners will enlist the help of their accountants to write a business plan for funding purposes. An accountant will prepare a professional looking plan, however you are going to pay for it and you have to question whether the cost of having a ‘professional’ plan is actually worth it. You have to remember the plan needs to be tailored to each specific business, therefore a detailed knowledge of the business is needed and no one knows more about their business than its owner. So, unless you are going for a very complex funding solution you really don’t need the services of an accountant to prepare a good business plan for your loan application. Writing a good business plan for a small business loan is not difficult however it does require some thought and care, but it is easily doable.