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Why Does My Lender Need a Business Plan?

Guest post by: Stan Prokop

Article Overview: The article discusses the need for a business owner to present a proper business plan to lenders, and the reason for the lenders request .

Why Does My Lender Need a Business Plan?

Many business owners or budding entrepreneurs are taken aback when their lender asks ( or insists ) on a business plan. Why do lenders need this document?

Lenders view the plan as having forced the business owner or entrepreneur to look carefully in a critical way into their business project. They feel that if the company needs to grow or be successful such a document will guide the business person to their goals. Ultimately the plan is a concise document which in effect communicates the business persons ideas to the lender.

In theory the business plan should identify areas of weakness or strength. If truth were to be known of course business plans tend to accentuate the positive. The writer of this article has a favorite saying - ' I never met a pro formal financial I didn't like '!

More about that last comment later, but suffice to say that in theory a good document geared towards financing should balance both the positive and negative aspects of the business and its financials. A solid business plan geared towards a lender will show you have ways of solving some of the business challenges raised in the business model and it's proposed financing.

We all know that stat's - half of new businesses fail within the first two years, 90 % within the next ten years. Why is that the case. Business guru's tell us its lack of planning. That is precisely why a business plan geared towards lending and the financials should be used as a critical follow up in the business. It should not be stored away! As we all have learned, ' tuition is extremely high in the school of experience '!

Most importantly though people that don't know you, or might not know your business model use a properly created plan to evaluate your business and lend you funds. The ' business plan ' in effect is really a financing proposal. That's how we look at it in our firm.

Let us remember how a lender, who you in many cases don't know, thinks. First of all he or she is hoping the information you have provided is true. Remember also that the lender works for someone, and they must communicate your idea to an underwriter of investment committee. If you haven't met the lender, trust me you definitely have not met the underwriter or investment committee.

Some of us also might think that we are the only business plan the lender is reviewing. That is not the case, our plan might be among 10-20 others in an given lending environment. And finally, people have biases - they will benchmark your own projections against their past experiences. If your business plan and financials make them think of Microsoft and Rim they will dig into the plan, if visions of Nortel come to mind that won't be the case!

Therefore business owners should put forth their plan on the basis that it will be ' attacked' by the lender, so the business owner must counter with ' real ' upside potential. The lender must genuinely feel some sort of enthusiasm about the business.

The biggest secret of business plans, and yes, we are revealing it here, is that they generally are not read in totality by the lender. The real world dictates they are given a 5 minute read, and more careful emphasis is generally only placed on the financials. The owner should never think that either quantity or finesse in fonts and graphs will gain the funding they require.

In summary, we do not infer that a plan is in fact not required for a lender or financing, in fact a business owner or entrepreneur with no plan is, outside of luck, guaranteed to fail.

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Article Tags: business plan, lender request for business plan



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