Key Takeaways:
Creating a business plan will help quell doubts a banker might have in approving your loan
The traditional business plan is the better option when crafting a business plan for a loan
The substantial time invested in crafting a detailed business plan is worth the effort, since it will help clarify your business vision to yourself and your banker
Running a business can be complicated. The good news is that typically the more structure we can give ourselves, the less complicated the process will be. A detailed plan for any endeavor increases productivity and allows you to achieve more goals. This is why having a well-crafted, detailed business plan is key.
What is a business plan?
Whether you’re starting a new business or expanding an existing one, you will benefit from writing a business plan. A well-written business plan can serve as a guide for yourself and your organization, and will support the business’ growth and center day-to-day responsibilities within overarching long term goals. More importantly, writing a business plan can help win funding.
Banks are typically seeking to minimize risk, which makes learning to write an effective business plan for a loan crucial. Banks want to be convinced your idea is worthwhile and profitable. They will scrutinize all facets of the business plan, from its organizational structure to its financial projections.
Bankers will need to be persuaded that your organization is standing on solid financial footing, and have credible and lucrative financial projections. Additionally, they will want to analyze your product and how it differentiates itself from the rest of the market. In other words, why is your product or service better than the competition? What makes it unique?
Ultimately, all this information is meant to help bankers decide if your business will be successful or not. They want to be certain that the loan they give out will not only be paid back, but that it will be a worthwhile investment. A convincing business plan will not only diminish their doubts, it will excite them to invest in your dreams.
What type of business plan is best?
There are two main business plan formats: traditional and lean.
Traditional business plans use a more formal structure that provides room for more details.
Lean business plans summarize the most important elements of your plan.
Although both formats are good for creating a plan and structuring goals, the traditional format is often the better choice when writing a business plan for a loan. A traditional business plan format provides the details most financial institutions need before they decide to lend out money. The lean business plan does not provide sufficient space to lay out your organizations financial statements, marketing strategies and overall financial health in detail. These plans don’t give you the opportunity to examine the organization’s financial health, both present and projected to three to five years down the line.
The next section will break down each section of a traditional business plan, giving recommendations on how to make your plan stand out and increase your likelihood of securing funding.
How to write a business plan step by step
There are no set rules on how to structure your business plan. However, informative and persuasive traditional plans usually consist of the following sections:
- Cover page and table of contents
- Executive summary
- Company description
- Market plan and analysis
- Organization and management
- Service or product
- Marketing and sales
- Financial projections
- Funding request
- Appendix
Tip: You don’t need to follow the outline exactly, but most traditional business plans provide a combination of these sections. Remember, the more details you include, the more likely you are to receive funding.
Additionally, you may need to consider including a section addressing any relevant factors affecting the entire economy. For example, if labor is in short supply at the time of creating your business plan, and the shortage is projected to persist for quite some time, you would benefit from addressing how your business expects to overcome those external economic shocks. Not only will these details help persuade the bank to provide funding during a difficult economic time, they will demonstrate you are able to consider matters that go beyond the minimum requirements.
Let’s break down each section.
Cover Page and Table of Contents
Presentation matters! Create a professional cover page and a detailed table of contents for easy navigation.
Every part of your business plan is a reflection of your organization and your brand – even a simple cover page and table of contents. Remember, you are essentially selling your business as a concept to the bankers. You want to ensure you are optimizing every opportunity to stand out, both in creativity and in professionalism.
Make sure you have a detailed table of contents, with the sections properly delineated and numbered. Doing so will make it easier for both you and the bankers to navigate through your business plan. You don’t want to waste time fumbling through your document trying to locate the exact page of the cash flow forecast as you are trying to convince the bankers that you are a professional organization.
Executive summary
Summarize the rest of the business plan and present a sales pitch.
We all know that everyone is busy and often a little overstimulated by the modern world, so make sure you don’t lose your reader’s interest at the start of your document. If you do, you increase your chance of ultimately losing your opportunity for funding. Engage the reader so they continue reading the rest of the business plan.
This section is both a sales pitch and a summary of the rest of the business plan. What is your business? Why is it destined to be successful? Why did you open your business? What product or service are you providing? What type of leadership does your business have? How recession proof is your business? What, ultimately, is the purpose for the funding you are asking? The whole of the business plan should be condensed in this section but, more importantly, the reader should share the same enthusiasm for the business after reading the executive summary. Ideally, the bankers should not only want to give you money, but to truly wish you to succeed.
Considering how important the executive summary is to your plan for attaining funding, it might be easier to come back to this section after completing the rest of the business plan. Since your business plan will already be filled out, you will be able to make a more effective summary.
Try not to overfill the executive summary with too much financial data, as it might come off as dry. If you are going to mention financial information, just focus on the overarching financial trends.
Company description
Present the details of your business and a mission statement with an overview of your organization’s principles.
Describe the details of your business. What problems does your business solve? Who or what organization is buying your product or service? How many employees will you have? What is your corporate structure?
This section should include a mission statement with an overview of the company’s principles.
Tip: Before writing this section, consider using a SWOT Analysis or the Porter's Five Forces model to get a fresh perspective on your business.
Market plan and analysis
Show that you’ve done your research by laying out your market and industry analysis clearly and in detail.
This section will require some homework. Convincing your banker that you understand the industry and market you’re entering is the end goal in this section. Keep in mind that this section is an analysis of the market but not a full-fledged plan for marketing your product or service.
So, ask yourself: What are the trends and themes of your industry? Who are your competitors? What does it take to win in this industry? Gather information. Boast about your strengths, but ground them with your research.
Even though you are already informed about your own industry and the details of the market you operate in, it’s good to start from the basics, to view everything with a fresh perspective. The complete guide to industry research and understanding industry life cycles articles lay out the necessary knowledge to start your research and get the most out of industry analysis. These types of methodologies help describe the intricacies of your market in a manner that will win over any banker reading your business plan. IBISWorld's industry reports, business environment profiles and industry risk ratings can help streamline your research process for this stage of your market analysis.
Market sizing is a beneficial process that helps to ground your understanding of your market and industry, through analysis such as measuring Total Addressable Market. The most convincing arguments are based on hard facts, so knowing how to calculate and present your company's industry market share will help demonstrate you are an expert in your industry. Additionally, using competitive intelligence to understand other players and demonstrate their performance in numbers will allow you to argue why your organization is better – and worth funding. Consider doing a formal Competitive Analysis. If you're in Australia, New Zealand or the US, IBISWorld's AU & NZ Enterprise Profiles and US Company Benchmarking collections can give you insights into your competitors that you can take straight to the banker.
Remember, before agreeing to lend out money, banks want to know the risk and whether the rewards offset that risk. Get ahead of that discussion by measuring industry risk with industry research. You’ll be able to respond to any doubts they have, because you did the necessary research.
Lastly, pick trustworthy sources. If you are trying to convince the bankers using concrete data, but you got the data from an irreputable source, your arguments become untenable. You’ll also need to correctly cite your sources, so the bankers can go directly to the source to verify.
Organization and management
Present your management structure in depth.
This section should list your organization’s management structure in depth. This list should include each position, its salary, the projection of that salary and an overall organizational chart.
Write this section as if you were a stranger trying to learn about a new company, and asking questions. Who is running the business? How is it being run? Are you a sole proprietor? Did you form a limited liability company (LLC)? What is the management staff’s relevant experience? Are there several positions with the same title? What are the differences between them?
Service or product line
Explain your product or service. Start from the basics and get in-depth regarding product lines, patents, pricing and market positioning.
In this section, explain in depth what you’re selling or the service you’re offering. Again, start from the basics. What do you sell? Who is the product or service for? How does this service benefit your customers? Reference data from your market analysis section – in other words, where does your product stand in relation to its market?
Additionally, are you filling out a patent? Have you done the research on the lifecycle of your product? What is the future of that product line? Don’t forget to lay out your entire product line and the pricing for each product. Ideally, add what price changes, if any, you will have to make in the future. This is also where you can include documentation of your product development process.
Marketing and sales
Present your marketing and sales strategies, including the personnel involved and the data driving your plans.
As you begin to write the Marketing and Sales section, ask yourself how you will pull in customers, and how you will keep them.
Describe in depth your strategy to connect your product with your customers. Are you going to advertise via traditional mediums, such as television or newsprint? Will you take advantage of the algorithms of social media? Conduct subtle guerilla marketing through an urban jungle?
Explain who is conducting the marketing and sales pitch. Are you a small company where everyone from the intern to the founder is cold calling potential customers? Do you have a dedicated marketing team? Will you have professional sellers who maintain a rolodex of returning customers?
Your ideas and plans in this section will benefit from referencing the data and calculations you explained in your market analysis section.
Financial projections
Lay out the numbers – give your banker the full picture of your organization’s financial standing, including forecasts, profit and loss statements, and cash flow breakdowns.
This section is meant to dispel any potential lingering doubts on the part of the bankers. By laying out the full extent of your organization’s financial health, the banker is more likely to approve your funding request. So, it’s important to be as detailed as possible with your financial projections.
Fortify your financial forecasts with your income statements, your balance sheets and your cash flow. Make sure to answer these questions:
What will the financial health of the company be in the next quarter? Over the next year? Over the next five years?
What are your sales forecasts?
Create a full picture and don’t forget to include profit and loss statements. Additionally, consider conducting Profitability Analysis to depict a more informed understanding of your current financial situation and the future possibilities.
Analyzing financial information can be confusing and intimidating, especially when your funding request is on the line. Learning about the 13 key financial ratios can simplify the analysis of all those figures for your financial projections.
Funding requests
Time to ask the big question – lay out how much funding you need and what you need it for.
This is the big moment: the culmination of the entire business plan. By this point, you have given a deep review of your company in a material sense, as well as by expressing your organization’s guiding principles.
Begin by outlining your funding requirements. How much funding do you need? Why do you need that amount? What are you buying or investing in? What returns will this investment create in five years? In ten years? Be detailed!
Remember to convince the banker that this business loan is worth the risk. Explain what each dollar is going towards and how it contributes to your future financial plans. Again, reference the data you have calculated. You want to persuade them by sharing your vision of the future, and seal the deal by showing them the bottom line.
Appendix
Compile any extra documents that your bank has asked for, plus any others that support your request for funding.
In the appendix, add any documents or materials that your bank or financial institution requested. They might ask for your credit history, product pictures, licenses, permits, and other legal documents. If you have a document that wasn’t requested but depicts your organization in a positive light, add it. Perhaps you have extensive documentation of your organization’s risk analysis or appropriate risk management frameworks? Or maybe you have extra information regarding ESG metrics that you didn’t include in earlier chapters? Add those to the appendix.
Final thoughts
If you follow every step and conduct each type of analysis mentioned, you will spend a substantial amount of time writing your business plan. However, once finished, a thorough and well-crafted business plan makes other processes much smoother sailing.
You will be able to focus on your in-person sales pitch, and hone your ability to close deals. Having your research compiled in a comprehensive document will allow you to review your business plan and be prepared for any questions that arise. Importantly, banks and financial institutions will see the time and effort you put into your business plan and be more inclined to offer you a loan. Plus, having your business goals outlined gives you a clear guide if and when you encounter challenges on the path to secure funding.
