A comprehensive business plan is an essential tool when looking to raising finance from banks and commercial lenders. However, many business owners and managers fail to understand exactly what lenders look for in the business plan before approving a loan application.
Banks and other commercial lenders are risk adverse. In other words, lenders are naturally cautious about the businesses that they lend money to and will look to minimise their risk where possible. It is, therefore, important to put yourself in the place of the lender and consider the sections of the business plan that they will look at thoroughly.
Lenders will pay close attention to the following sections of your business plan:
- Director/owner investment
- Serviceability of the debt
- Track record of the business
- Marketing plan
It is essential to ensure that these sections are presented clearly and concisely, and you should back up any claims made with quantifiable proof in the form of carefully researched, accurate figures and financial data. Ensuring that your management accounts are kept up-to-date will make this a much simpler process.
Director/owner investment
In this section of the business plan, the bank or commercial lender is looking at the financial commitment of the business owner or directors. Specifically, they want to see the amount of money that has been put into the business, and how far the owner or directors are willing to back the business financially.
Lenders want to see that those trying to raise finance are financially committed to the business themselves. The more the business owner or directors have invested in the company, the more the lenders will view these individuals as being committed to the business and, therefore, will be more likely to view their finance application favourably.
Another way to demonstrate increased commitment to the business is to transfer a percentage, or the total amount, of director’s loans on the balance sheet to share capital. While ‘director’s loans’ provide tax advantages for the owner or directors they also show up as liabilities on the balance sheet. By transferring some of the value into ‘shareholder capital’ the balance sheet will have an improved net worth.
Serviceability of debt
Lenders will study the financial information for proof that the business can repay the loan. The profit and loss, cashflow forecast and balance sheet, along with proof of the business’ credit history, are essential to provide the lender with a picture of the current and future trading positions of the business.
In particular, the cashflow forecast is important as it predicts whether there is enough cash coming in on a regular basis to ensure the business can meet its current bills. The lender will want to see the current position, along with a forecast indicating future trends which show how the business expects to repay the increased debt.
As part of the lenders’ due diligence process, they will also look at the financial ratios. Ratios, including the debt/equity ratio, liquidity ratio and working capital ratio, assist lenders in understanding the current and future position of your business and they will compare and contrast these ratios against those of other businesses in your industry sector.
It may be worthwhile gaining some understanding of financial ratios yourself, as they can be used to decipher trends occurring in your business that you may not be aware of. They can also be a useful tool to predict future trends.
It is, therefore, essential that your management accounts are kept up-to-date so that you can present the current status of the business to the lender. Accounts that are six months out of date are not as useful as up-to-date records
Track record
The track record of the business is important to lenders when considering whether to approve a loan application. Information that the lender will be interested in includes:
- Profitability throughout the year
- Seasonal trends
- Cashflow spikes
- Significant cost increases or reductions
- Year-on-year comparisons of all the above
By using this information the lender is looking for reassurance that the business is stable.
In addition, the lender will look at the business’ financial track record in relation to the industry norms, or how other businesses in your sector have performed. Lenders have accrued financial research on each business sector and will compare your business’ projected performance to the standards they have noticed for that industry.
Marketing plan
A comprehensive marketing plan, which proves any new marketing strategies and tactics, will also help to reassure the lender that your finance application is viable.
The marketing plan should reflect how increased funds will be used to acquire new business contracts and/or sales. This is likely to be an important focus for a lender investing in the growth of your business.
When putting together a business plan to raise finance, it is important for business owners and directors to try to view their own business from the lenders perspective. Take a step back and ask yourself: ‘Would I invest in a different business in a similar position?’