Entrepreneurs and small business owners often create business plans quickly without thinking about them. Although having a business plan is important for obtaining loans from banks, having one is even more important. It is often overlooked because most business owners need to know what banks want.
A business plan’s contents heavily influence the bank’s decision to lend money. More than that is needed to ensure all headings are covered in the table.
What are banks looking for? We will discuss the importance of competition and market analysis in a business plan. Both are crucial to banks’ decision-making processes.
Demonstrated knowledge of the key market
A business plan contains a detailed analysis of the market and industry within which the company operates. Banks want to know more than just the market size and market share.
A potential lender will ask the following questions to get a better understanding of the market in which the company operates:
- What is the market size? In what area is it located? What is its estimated turnover?
- It is in the middle of its growth cycle. Is the startup mature or declining?
- How large is your business’ market share?
- What will it cost the company or its competitors to enter this industry? What are the barriers that prevent entry?
- It is how competitive?
- Are there regulations?
- What is their demand?
- Which business is its direct and indirect competition?
Potential lenders will also look at the ability of the business to:
- Attract new customers
- Attract and keep good employees
- Fully utilize your operating capacity
- Reach your target customers
- Retain existing customers
These key success factors allow a business to succeed in its target market and are often included in the Industry and Market Analysis section.
Analyzing and understanding the competition
Banks will be keen to examine and question a business plan that includes competition analysis. The competition analysis section must demonstrate that the business owner understands their business strategy and model and how they might react to changes in the market.
Content should identify top competitors’ strengths and weaknesses and highlight the customer needs that still need to be met by them.
Understanding competitors’ financial performance will help support estimates about the potential returns a business may make in its market. This information will help you to create realistic sales projections.
The analysis will identify both the opportunities and the threats to the business. Some options can be capitalized upon and integrated into a well-articulated business strategy. Some threats must be managed or mitigated.
How do banks view a business plan’s merits?
The bank will pay a fixed rate of return for loans to small businesses. This is because they are unlikely equity investors and take the risk of losing the most. They also get all the upside profit as compensation. Banks will always consider the chances that a business faces when assessing a business plan’s contents.
Entrepreneurs and business owners need to address and highlight the risks and opportunities for their business in the business plan submitted to banks to support a loan application. Banks will feel more confident if the business plan addresses and mitigates risks.
The bank will more likely approve a business plan covering risk mitigation. This will give the owner of the business credibility and increase the likelihood of a favorable outcome.