Tips For Creating Lender Ready Business Plans

Guess what? Lenders can't approve every loan application that crosses their desk.  I'm sure they wish they could, but the fact of the matter is that they deal with mostly very small businesses seeking small loans, usually less than $250,000. Lending to inexperienced, new business owners is one of the riskiest arenas for a lending agency.  That's where the eye for looking for those classic, "business plan killers" comes in.  These lenders and investors that you're going to be meeting with know what they're looking and they know how to read between the lines of your business plan and what constitutes a "red flag."  Here are the five most common killers of a good business plan:

1. Dreadful Personal Financial Profile 

Be extremely careful with your numbers.  Classic red flags pop up in business plans in the form of high credit card financing, garages full of toys (trucks, bikes, boats) 90% financed, poor credit history and no savings.  Lenders will be looking at your personal finances as a way to see how you'll be able handle the finances of the business.  If you're house isn't in order then it's likely your business won't be either.

Solution: Tidy up your personal finances before applying for a business loan. Pay down loans, clean up any bad debts, collect some business-related equipment and save some money. 

2. Insufficient or Non-Existent Owner Equity or Security 

Business is always risky, but new business is infinitely more so. Lenders will want to see you personally "invested" in your business. The part of the business you personally own is called your equity. Another way to describe equity is the amount of cash or equipment you put into the business. A lender wants to see that you are invested to the point that you will not be inclined to walk away when the going gets tough.  Makes sense, right?  I mean, how can you ask someone to give money for your business if you're not invested in it fiscally?   

The question then becomes, "How much owner equity is enough?" This amount varies from lender to lender, but less than 10% is inviting scrutiny while 20% or more will make your proposition more enticing.  Security is the surly sister of equity. Your loan application will be stronger if you bring some sort of asset to the table as security. Lenders will be more attracted to assets with a clear resale value of more than the loan. Inventory is usually less desirable because it tends to grow legs and disappear when the going gets tough. 

Solution: Create some equity to bring to the table. Save money, sell some toys, etc. 

3. Inadequate Market Research

Know your market.  Seriously.  If you're getting into a business that involves real estate, the lender will want to know that you understand real estate.  Present current information regarding the industry and market, but don't be upset when the only information you can find is two years old.  The reports you're trying to cite may not even be out there or readily available.  Just do your best, but keep in mind that you'll have to actually speak to your knowledge and expertise regarding working in a field you.  Lack of market research can lead to a business plan that is too general - not specific enough.  A lender will want to see that you have "turned over all the rocks" in search of knowledge about your business. After reading your business plan, if the lender feels that they know more about your business than you do, they will not be inspired to approve your loan. 

Solution: Prove your business case to yourself and to your reader. Persist in your market research efforts until you become "the expert" for your business. You will feel more confident and have an easier time convincing your readers that you know what you are doing.  

4. Shoddy Presentation 

Your business plan is a tool for communicating with others. What is your product or service? Who are your customers? How will you market and distribute your product or service to your customers? Will you make money? Will your business be able to repay the loan? Does your plan communicate these things clearly?  You can do the best market research on the planet, but if you can't communicate it clearly and package your business plan professionally, your target audience might not even read it. 

Solution: Provide a professional presentation. Ask a friend or pay someone to proof, but do a professional job. Demonstrate that you care and you will increase your odds with the lender. Answer the basic business questions. Who, what, where, why, when, how. There are many business planning systems (although none surpass the Roadmap!) that will provide a framework to keep you on track. A proper business planning system will provide you with a framework in which to place the assortment of information you will gather.

5. Unrealistic Expectations 

Inflated, overly optimistic sales forecasts or cash flow projections will derail your loan application every time. Enthusiasm should not be mistaken for blinders.  A future too bright will blind the lenders and scare them off the loan. 

Solution: Be realistic in your expectations. No matter how lofty your financial aspirations might be, know that businesses are usually not profitable for the first six months to a year. Estimate your sales conservatively and your expenses a bit higher than you think they will be. Keep the cash flow realistic and be sure to include ALL expenses. 

Keeping in mind these five points will be a big help if you're going before a lender.  The plan is a tool and should be used accordingly.  Make sure you're using it correctly; that you can speak to its authenticity and accuracy, and that you are realistic regarding its expectations and your abilities.  Lenders want to help you and avoiding these pitfalls will make that happen.