Capital is crucial for every new startup business, and hopeful entrepreneurs typically use business loans to borrow the needed cash. As you plan to start your new business, you'll need to find a lender that will approve your loan. Of course, lenders base their decisions on several things, but your business plan plays the most significant role. Therefore, you must learn how to write one to increase your odds of the lender approving it. Here's a breakdown of how to write a business plan and what to include.
Do you need a business plan to get a loan?
A business plan is a written loan proposal. It details critical information about your business and persuades the lender to issue a loan to fund it. While the lender might have questions before approving the loan, the business plan should answer most of them. It should also give the lender confidence that you've researched your business and invested time into planning and developing it.
Therefore, if you want to borrow money to fund your company, you need a business plan. A business plan is detailed and requires a plethora of information. It tells the lender the business type, target market, strategies and more. It also reveals how you plan to make money, your projected expenses and expected revenues. Before taking on this challenging task, you must learn how to write a business plan.
How to write a business plan for a loan: key business plan components to include
Creating a business plan for a loan takes time, thought and effort, and needs to contain the following components:
Even though the executive summary is the first paragraph in a business plan, it's the last section you should write. The executive summary recaps the main points of your plan and tells the lender why it should invest in your business. It's a snapshot of your business's highlights and states how much money you want to borrow.
You can choose a business plan template for loan requests to simplify the plan's writing process instead of starting from scratch. Many templates suggest including your mission statement in the executive summary. The core goal of this initial section is to spark the lender's interest in your company. If you can do that, the lender will continue reading it.
This section tells the lender your business type and the industry it's in. It allows business owners to highlight their previous work, jobs and skills to demonstrate experience in the field. It states where your business will operate and who will run the company.
This section also provides the perfect opportunity to explain your commitment to the startup. Be as transparent and detailed as possible when describing this new endeavor. The number one goal of this section is for the lender to fully understand what your business does.
Products or services
Every business sells products, services or a combination of both. Selling something — whether it be a product or a service — is how a business generates revenue. Start by describing in detail what your business will sell. Next, highlight the features that set your products and services apart from those of your competitors. List the patents or copyrights of your goods, if applicable, and list the things your business needs to operate. For example, you might need a building from which to operate or equipment to produce products.
Creating a business that offers a unique product or service is nearly impossible today. As a result, your business will likely compete with other businesses. You must address this in the market analysis section of your business plan for funding. What other local businesses have similar products or services? How do you plan to attract some of this market? You might include some details about your target customers, such as their demographics. Finally, include a brief synopsis of your marketing plan in this section.
Lenders want to know if your business will succeed before they approve your loan proposal. Therefore, they want to know that you've thoroughly researched your competition. You can list your competitors in this section, including their products and services.
Next, give a more detailed analysis of what differentiates your services and products from theirs. What is unique about your company? What advantages will your company have over its competitors? Keep in mind that lenders base loan decisions on risk levels. If the lender can't see the need for your business's products, they might turn down the loan. The goal of this section is to convince the lender that there is a demand for your company's products and services.
Next, include specific details about your marketing strategy, including financial plans. How much money will you spend on marketing efforts? What methods will you use? How do you know they'll be effective? Marketing is a massive part of a business strategy, so your plan must answer these questions.
The operational plan explains how you'll execute your business startup to the lender. It reveals more details about your company's location, its target market and the equipment and software you'll use. Additionally, it explains the processes you'll use to produce or sell your goods.
A business plan must also list the management team. You might be the sole owner of the business, but will you work alone? If not, who will work for you? Not only should you list their names, but you should also describe each person's experience, skills and qualifications. Additionally, explain each person's roles, duties and responsibilities and the hierarchy of the management structure.
The purpose of writing a business plan is to request a loan. Therefore, you must include your funding requirements in the business plan. How much money do you want to borrow? How will you spend it? You should explain in detail how you will spend the funds, as this validates your need for the loan. The lender can see if you have a clear plan and if the plan makes sense.
This next section outlines your company's projected profitability, which is vital for repaying the money you borrow. Lenders spend a lot of time reading through the financial parts of a funding request. When writing this section, begin by stating your projected annual revenues for the next three to five years. Next, include income statements to highlight your company's potential net profits. You can also include forecasted balance sheets, which help the lender see your assets, liabilities and capital.
Including a break-even report is also helpful. This metric reveals how much you must sell to cover your expenses. For a lender, it reveals safety margins, helping lenders assess risk levels.
This section offers a place to add supporting documents to the plan. It should contain a list of your business licenses and permits needed to operate the company. You can also include your management teams' resumes and a copy of your lease agreement for the space you'll rent. Include any other documents the lender might want to see, such as contractor or business arrangements.
Many businesses hire lawyers to create their business entities. Include these legal documents if you created a business entity. If you haven't created one yet, you should consider which type to use. An LLC is a good option, as it provides tax benefits and liability protection. You can look for the best LLC loans if you choose this route.
The 5 Cs of Credit: how lenders score your business loan application
You submit a business plan to secure funding, but a lender must approve the plan before you receive the loan. Lenders determine how to respond to business loan requests by analyzing the business plans they receive. To do this, they look at five primary things.
Character reveals intangible qualities about you and those who will work with and for you. Lenders look for integrity and honesty and try to answer the question, "Is this person trustworthy?" Lenders analyze your personal credit history to determine your creditworthiness. In addition, lenders evaluate your job experience, reputation and qualifications. They also look at your previous endeavors to determine the risk level associated with offering you a business loan.
Lenders spend a lot of time analyzing a borrower's ability to repay the money they borrow, and they call this capacity. Are you capable of repaying the money if they approve the loan? To determine the answer, your lender will thoroughly review your projected revenue. Additionally, lenders analyze the forecasted financial statements, including cash flow statements. Lenders review the products and services you'll offer to ensure there is demand and consider your funding request and your plans for using it.
Next, the lender looks closely at your capital. They want to see how much money you have invested in the business and compare it with the amount you're requesting.
Your investment shows your level of commitment. A large investment into your business startup shows the lender you're serious about making it work. It also tells them you've researched it, worked hard on planning it and expect to make a good profit from it. Therefore, make sure your business plan clearly indicates your investment amount.
In addition to your investment, the lender wants to know what you can offer as collateral. For example, you could offer the building you'll operate out of as collateral if you own it or have equity in it. You could also use equipment, machines or vehicles. Being willing to offer assets as collateral improves your odds of getting the loan.
Finally, lenders will look at the following conditions:
- Demand for your service: Proving a high demand for your products is critical to get a loan approved.
- Competition: Your lender will evaluate the competition and look for things that distinguish your business from your competitors.
- Trends and marketing strategies: Will there be a demand for your products in the future? If so, does your plan outline how you'll reach more people? Lenders look at your digital marketing strategies, as this is the newer trend. It also looks at your advertising strategies, including your website, SEO strategies and inbound marketing plans.
Summary of Money's how to write a business plan for a loan
Learning how to write a business plan for a loan is essential. Your chances of getting approved for startup funding are significantly higher with a clear, thorough and well-researched business plan. Your plan should contain a comprehensive description for each section, allowing the lender to learn as much as possible about your business endeavor. After submitting it, the lender will use the 5 Cs to analyze your loan proposal. A well-written and researched business plan is imperative for any new business startup or newly formed company that needs to borrow some cash.