A business plan is a document that describes a company's goals and how it will achieve them. It includes a roadmap for the company from a marketing, financial, and operational perspective. Business plans can be detailed, but they are used by all types of businesses, from large, established companies to small startups.
If you're applying for a business loan, lenders may want to see a business plan. A business plan proves that you understand your market and business model, and that you're realistic about your goals. Even if you don't need a business plan to apply for a loan, creating one can increase your chances of securing funding.
Key Takeaways
- Many lenders will require you to prepare a business plan to support your loan application.
- Although every business plan is different, there are some sections that are common to all business plans.
- A good business plan defines your company's strategic priorities for the next few years and explains how you intend to achieve growth.
- Lenders will evaluate your plan against the “Five Cs”: character, capacity, capital, terms and collateral.
Why do you need a business plan?
There are many reasons why every business should have a business plan. While a business plan can improve the way a company operates, a well-written plan can also be invaluable for attracting investment.
On an operational level, a well-written business plan has several benefits: A good plan describes how your company will develop over time and identifies risks and contingencies that you may encounter along the way.
A business plan serves as a valuable strategic guide that reminds management of long-term goals amid the chaos of day-to-day operations. A business plan also allows a company to measure its success. Without a plan, it's difficult to know if your business is moving in the right direction.
A business plan can also be helpful when dealing with outside organizations. In fact, banks and venture capital firms often require a viable business plan before they will consider funding a new business.
Note
Even if your business is established, lenders may want to see a solid business plan before providing you with a loan. Lenders want to mitigate risk, so they want to see that your business has a serious, realistic plan for generating revenue and paying back the loan.
Business Plan Sections
Every business is different, and so is every business plan. That said, most business plans include several common sections. Common sections are: executive summary, company overview, products and services, market analysis, marketing and sales plan, operations plan, and management team. If you're applying for a loan, you'll also need to include a funding request and financial statements.
Let's take a closer look at each section.
executive summary
The executive summary is a summary of the information in the rest of your business plan, but it's also where you add interest in your business.
You should include some basic information about your business, such as what you do, where you are located, what you produce, how long you've been in business, etc. You can also mention how you started the business, your major successes so far, and your growth plans.
Company Profile
In this section, you focus on the core strengths of your business, the problem you want to solve, and how you plan to address that problem.
This is where you should mention how your company has an advantage over your competitors, such as expanding into a new market or a unique approach to an existing market. Key statistics like annual sales and number of employees should also be included in this section.
Products & Services
In this section, you provide some details about the product you're selling. Lenders don't need to know all the technical details of the product, but they do want to make sure that the product is desirable.
You can also include information about how you manufacture your products or provide your services, which can be helpful to lenders looking for funding to expand your business.
Market Analysis
The market analysis is the core section of your business plan. It's here that you need to demonstrate that you understand the market you operate in and how you differ from your competitors. If you know statistics about your market, especially its predicted growth over the next few years, include them in this section.
Marketing and Sales Plan
Your marketing and sales plan details what new customers you want to attract and how you're going to connect with them. This section should include your sales goals and tie them into your planned marketing and advertising.
If you're considering expanding into new markets or want to reach customers you couldn't reach before, you need to explain the risks and opportunities of doing so.
Operational Planning
This section describes the basic requirements for running your business on a day-to-day basis. Your specific requirements will vary depending on the type of business you run, but try to be as specific as possible.
For example, if you need to rent office space, you should include that cost in your operations plan, as well as the costs of staff, equipment, and raw materials you need to run your business.
Management Team
When applying for financing, the management team section is one of the most important sections of your business plan – lenders want assurance that you have a skilled, experienced, competent and trustworthy senior management team in place.
Note
Even if your team is small, you should explain why each member is qualified for their role. If your team is large, you should include an organizational chart that explains how your team is made up.
Funding Request
When applying for a loan, you'll need to add a funding request, which is where you detail how much you'd like to borrow and how you plan to spend the money.
The most important part of the funding request section is to explain how the loan you are seeking will improve the profitability of your business, thereby enabling you to repay the loan.
Financial Statements
Most lenders will also require you to submit evidence of your business's financials as part of your application, and it's often helpful to add graphs and tables to this section, as they allow lenders to see your financial situation at a glance.
The overall goal of submitting financial statements is to show that your business is profitable and stable. Include 3-5 years of income statements, cash flow statements, and balance sheets. It's also useful to provide projections for future business growth and further analysis.
What do lenders look for in a business plan?
Lenders want to see that your business is stable, that you understand the market you operate in, and that you have realistic plans for growth.
Lenders make their decisions based on what are called the “Five C's.” These are:
- character: The executive summary, company overview, and management team sections allow you to highlight your outstanding personality traits.
- capacity: This is essentially your ability to repay the loan. Lenders will look at your growth plans, capital requirements, and financial statements to assess this.
- capitalCapital: This is the amount of capital that's already been put into the business. The larger and more established your business is, the more likely you are to be approved for a loan, so make sure to emphasize capital throughout your business plan.
- conditionsConditions refer to the state of the market. Your market analysis should prove that your business is well positioned relative to your target market and competitors.
- collateral: Depending on the loan, you may be asked to provide collateral, so be sure to include information about your assets in your business plan.
How long does it take to create a business plan?
The amount of time it takes to write a business plan will vary depending on your business, but you should take the time to ensure that it is thorough and accurate. A business plan has the benefit of providing a strategic focus for your business beyond just applying for financing.
What should you avoid when writing a business plan?
The most common mistake business owners make when writing a business plan is having an unrealistic idea of their growth potential. Lenders are likely to notice overly optimistic growth projections, so make sure you stick to reasonable expectations.
Should I hire someone to create a business plan for my business?
Although you can hire someone to write a business plan for you, it's often best to write it yourself, as you're likely to understand your business better than an outside consultant.
Conclusion
Writing a business plan will benefit your business whether or not you apply for financing. A good business plan helps you develop and follow strategic priorities. It describes how you plan to grow your business, which is valuable information for lenders, as they want to know if you'll be able to repay the loan.
