As a Banker, for the past 30 years, I have seen many types of Business Plans. This article will assist the reader with what answers a banker looks for and what areas should be covered in the Business Plan. A Borrower must learn how to effectively communicate with the Banker. Time must be spent on the Presentation to the Bank.
So Who reads this Business Plan?
Hopefully, the Lender you meet with, but not always
A Loan Center, which may be in another state
A Credit Committee, depending on the size of the loan and/or bank
An Investor contemplating their risk level
Goals and Objectives for the Business Plan
“Who” your client is
“What” your expenses are
“When” you’ll begin to break even
“Where” your client is
“Why” your idea will work
“How” you plan to market to them
The Business Plan Format
A lengthy Business Plan isn’t necessarily the best plan. Bankers are approached with many requests for financing. Time is a factor and being precise, in a condensed fashion, may be your best chance for time being spent on the reading of your Business Plan. Following are some important, not to be left out, components of a Business Plan:
Executive Summary – what do you want to accomplish with this request
Company Description – what do you do, what have you done, and what is your company Mission Statement
Background – what makes you capable of success in this line of work
Industry Analysis – what are the Trends and Forecast for your industry
Target Market – what type of market research have you completed and what are the results. Do you have a marketing plan that makes sense
Competition – why are you better, price should not be your answer
Sales Strategy – how do you plan to approach sales
Operations – what type of facility, equipment and people do you need
Technology – do you understand today’s technology and how it relates to your industry
Management – who composes your team, are you covered
Break-Even – what is yours and how will you get there
Projections – do they make sense and why
Funding – where will that come from and why would a bank support you
Following are some “real life” Business Plans I have reviewed over my years in banking. From a Banker’s viewpoint, I will cover what I liked, what I didn’t like, and how far the plan went towards fruition.
“I want to open a Retail Store”
In this scenario, I was approached by a successful business man looking for future income to support his children’s education. He had visited every bank in town and no one showed interest in reading his Plan. His words of advice were “stay where you are, your safe.” Safe did not educate his children, pay his bills, or protect him from future downsizing that often hit his field of employment.
The Business Plan was concise and to the point. The Client had no background in the industry, but his wife was educated in the field. He had no background of self employment, but his father had operated a business his entire working life.
His Industry Overview was based on One on One conversation with people in his industry. He visited this type of store on every business trip and vacation, finding those outside his market would easily share information.
His Projections were based on actual expenses he had learned from these conversations, however, his Sales were unknown.
His Plan lacked information on his market area, targeted client base, and number of individuals needing his products.
Due to the retention of his employment to support his living expenses, there was a question as to how he would stay in control of the everyday operations. His wife was raising two small children at home.
The Result: this loan was approved based on the client’s good credit score, sufficient income and collateral in his home. A strong manager, experienced in the field, was located to operate the store during the owner’s absence. The owner’s income supported the payment on his business loan until the store was able to generate sufficient profits. Through his 10 years in business, he was confronted with many downturns and challenges.
Diversification was needed at one point. Prior to the entrance of the big box stores, the business was sold for a profit and large enough to educate the kids!
“I want to open a Pretzel Shop”
This Business Plan was presented by a gentleman that had recently lost his job due to business relocation. He attended a trade show on franchising and was provided with the Corporate business projections and operating plan. Before investigating further, he cashed in his retirement savings, bought the franchise, and signed a lease with a local mall. He then approached the bank for financing.
In this example the client was of the understanding that the franchise plan and projections would be sufficient data to secure a loan.
In order to educate the client on the importance of market area, I sent him to another local mall to watch the operation and traffic to another pretzel franchise. At the end of his day, he found the average sale of $2.36 was a far reach from his annual sales projections of $2 million.
This client had no business background, no knowledge of the industry, and could not afford to hire anyone with expertise in this field.
He had utilized all his savings to purchase the franchise and put a deposit on his lease. An additional sum of $60,000 was needed for site development, equipment, inventory, and other costs. Based on his unsubstantiated projections and lack of collateral, he could not get a loan approved.
This client learned the hard lesson of not doing a Business Plan. He ventured into an unknown field, out of desperation, and with little thought into the consequences. In my last contact with this individual, he had sold his home and moved to Florida. He had signed a lease with a mall in Florida and was opening his shop. I hope his venture had a happy ending!
“I am ready to open my Chiropractic Office”
In this scenario, I was approached by a young man, newly graduated from college, with a degree in chiropractic. Assuming his degree was sufficient evidence of his future success, he inquired about a loan to open his practice.
This individual definitely had the expertise in his field. He had graduated high in his class and was ready to start his career.
With $120,000 in student loans, no savings, no assets, and just an automobile to his name, this Borrower was a poor risk for any type of loan obligation.
After our first meeting, and some disappointment, the young man ventured out to see what he could find. He located a ready for retirement chiropractor willing to sell his practice for a reasonable sum. A Business Plan was prepared based on the existing practice sales and expenses. Knowing the client base would drop, before increase, a percentage was deducted due to the new, inexperienced ownership. The existing doctor promised to stay on, in consulting mode only, for the first six months of operation.
Funds for the purchase of this business still needed to be obtained. In order to approve this request, someone with an established credit rating, assets to their name, and collateral needed to be found.
This loan was secured with the young doctor’s father as a cosigner. In addition to signing his name, the father also permitted a lien on his mutual funds as the collateral to support this loan. The young man was able to open his practice and start into his dream career!
“I have a Patent, what’s next”
Throughout my career, I have been approached with this or a like question. Some already have a patent in process; others have invented “the next best thing” and want to know next steps. The client I will discuss today is one that had the idea, built the prototype and was ready for his next step.
The client’s first connection was with a company that can put the concept into numbers. There are various companies that do this type of business, all on varying integrity levels. Make sure you get references before entering into this type of undertaking.
Once the client understood the costs involved with building a working prototype, manufacturing and distributing his invention, and marketing the concept, he began working on the Business Plan and funding sources. In this example, Angel Investors were utilized for funding. Each investor wanted a share of business ownership for their money contribution. This client was willing to share in the wealth.
The Business Plan was reviewed in great detail by all investors, prior to agreed upon involvement. The Plan was extensive in nature and included a Confidentially Agreement due to the nature of the request.
A foreign company was located for the manufacture of the item and a large corporation agreed to sell the product on their shelves. The profit margin shrunk as more and more players became a part of this transaction.
In conclusion, it has been two years and the Inventor has yet to realize any profit from his product. He is happy with his progress so far and expects to reap the benefits of his invention in the future.
In all of these examples, a Business Plan played a very large part in the operation, management, financing, and creation of the business. We have seen that a strong Business Plan can both avoid a terrible mistake and meet a life’s dream. Extensive investigation, soul searching, personal investment, and goal setting must be included in this most important process.
My Favorite Quote:
“There are two important days in your life…..
The day you were born……
And the day you find out why. “