How to Write a Business Plan for a Business Loan Application
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UPDATED: Aug 6, 2012
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Creating a business plan is an entrepreneur’s first step to secure business loans from lenders. Business plans are required by all lenders, regardless of whether a lender is private or backed by the Small Business Administration.
This step is so crucial that appearing before a lender without a business plan is probably the quickest way for borrowers to be denied their business loan.
Business plans show that entrepreneurs are not only serious about their profitable idea, but that they have also done the due diligence necessary to launch a company. Additionally, and more importantly for the lender, it shows that the borrower—or imminent entrepreneur—is offering a viable opportunity for the lender to make a profit on the loan.
While “flying by the seat of their pants” may be tempting for many entrepreneurs, it is important to understand that a business plan should project 3 to 5 years into the future. It should outline the company’s plans to grow and maintain profits. Finally, a business plan can help entrepreneurs take a proverbial step back from their idea and think objectively about their venture.
After finding a niche or specific area of industry for a company, entrepreneurs should begin writing out a business plan to obtain a business loan.
There are nine key steps to writing a perfect business plan.
Step 1: The Executive Summary
Appropriately coming first, the executive summary is considered the most important component of the business plan, and it’s absolutely necessary to qualify for loans.
As its name implies, the executive summary briefly explains to a reader—which is usually a lender—the current state of an applicant’s company, the future goals of the company, and, most importantly, why their company will be a profitable enterprise to lend money to.
As with all first impressions, an executive summary is an entrepreneur’s first opportunity to impress a lender.
Step 2: Market Analysis
Getting more technical, the market analysis of a business plan demonstrates the knowledge that business loan borrowers have of the industry they are about to enter. It should include the size and growth rate of the industry, and it should also discuss the market that the imminent enterprise is targeting.
Step 3: Company Description
The company description explains to lenders why it will be in a unique position to enter a particular market and succeed. By explaining the nature of the company itself, both lenders and business loan borrowers can better predict how it will perform against competitors and how attractive it will be for customers.
Step 4: Organization and Management
A company is only as good as its team and an examination of the team is the main purpose of the Organization and Management step.
Through a written hierarchy, this step will detail the internal organization of an applicant’s company. This section must explain who will be involved in the company and what each team member will do to help achieve success. It will also explain how each team member is qualified to work for the new company.
From a legal perspective, this step will address what kind of corporation the company is. It will also identify who is in management and the board of directors.
Step 5: Marketing and Sales Management
Just as a company cannot survive without customers, no business plan is complete without an explanation of marketing and sales management.
This step must explain the marketing strategy of an enterprise. If an applicant’s firm is geared towards local services or sales, he or she should explain how they will target the local community. If a firm aims to target the mass population, an applicant should give details on how they intend to target the masses.
Fortunately, the internet has made communication very accessible for even small businesses, so entrepreneurs shouldn’t be hard pressed to explain how they will compete for the attention of the massive internet audience.
A discussion of sales is also important since the direction of a sales team can help or hinder a fledgling company.
Step 6: Service or Product Line
A company can only make a profit by offering a product or a service. In this step, business loan borrowers must explain what their service or product is and why customers will demand it.
Step 7: Funding Request
In this step the applicant will request the amount of funding needed. Additionally, an applicant will use this time to explain how the funds will be used. Plans must be in place for possible buyouts, acquisitions, and outstanding debt repayment since each of those influences a borrower’s ability to repay business loans.
Step 8: Financial Projections
Financial projections will show the amount of money and growth that a company expects to achieve in the next five years. This step typically includes quarterly projections for at least the first year and yearly projections for the remaining four.
It is important that all financial information is accurate and correlates to any previous data in the plan. Failure to do this reflects poorly on a business loan borrower and shows a lack of due diligence.
Step 9: Appendix
Including an appendix is an optional step, but it allows ease of access for lenders to examine all of the information in an applicant’s business plan before lending business loans. In addition to adding a level of convenience, the appendix also adds a final touch of professionalism.