When it comes to securing a loan for your business, banks want to have a solid knowledge of your company’s past, present, and future; or in short, your business plan. You need to have a compelling and clear business plan that demonstrates that you qualify for a loan.
A bank’s primary concern is getting their money back with a reasonable return. To increase their odds, there are a couple of things they will look at in your business plan, because it should include everything from why you need the money to other loans you already have.
Here are some of the most common things that banks look for in business plans:
Cash Flow
A strong and well-documented cash flow is the most convincing thing that guarantees you will be able to repay a loan. Banks will be interested in your income sheets, as well as your income statements and tax returns for the past two or three years.
Understanding of Your Market
Banks want to make sure you have a solid understanding of your market. For example, if you were to write a bar business plan, you should include information about the bar business in general, the key trends in the industry, and research on your customers and on your competition. You’d also want to answer questions about your competition as: Are they doing anything that you aren’t? Or is there a competitive void in the marketplace? (For example, maybe no local bars have a Monday Night Football special, and you could be the first to add one.) Providing this information in your plan shows lenders that you understand the market and thus can succeed in it.
Collateral
Even some of the strongest businesses can be faced with unforeseeable circumstances that can restrain them from being able to repay a loan. So, if you’ve just started a business, it is highly unlikely for banks to give you a loan without collateral. These may consist of home equity, business assets, vehicles, equipment, and accounts that banks can seize in case you fail to repay a loan. Most banks look carefully at the assets you have to reduce their own risks.
Financial Details
The most crucial part of a business plan is sharing all your financial details for a bank loan. Banks will look especially close at this section to review all your financial details and evaluate your company’s capital. This includes all loans and debts incurred, credit card accounts as well as how much capital is invested in your business. A good history of these shows that you are committed to the success of your business and make you a good prospective borrower.
Management
Most banks will review the personal financial situation of those in managerial positions as well. If you or a co-signer’s personal financial position are significantly stronger than the business, banks will go ahead and proceed with the loan, provided that you personally guarantee the loan. If you have successfully run other businesses before, this will increase your chances of securing a loan for another business.
Insurance Information
Banks will often ask new business owners that depend on the financials of the key founders to have death insurance or key person insurance. This can ensure the banks that even though a key founding member dies, the insurance can help to pay off the loan.
Writing a business plan requires a lot of work, especially if it’s needed to secure a bank loan. It is very important that you do your homework, get everything in order and stay prepared for anything that hinders your capability to get a loan. Good knowledge of all the ins and outs of your business will help you write an effective business plan.