Small businesses that have limited resources are often challenged by the idea of asking their bank manager for funding. It is common for small businesses to be challenged by the thought of facing their bank manager to apply for business funding. You will need to submit a business plan with your application. It may seem strange that investors or lenders require you to submit a business plan. You may be wondering why banks ask you to create a business plan. Once you understand the reasons, you can see why investors want this document. It will take time and money, but it will help you get the finances you need if done correctly.
Here are some reasons why banks need a business plan
1. Banks take a risk on your business.
They need to be able to assess that risk and see how it compares with the expected return for your business. Did you ever wonder how banks make money for shareholders? They do this by investing their capital (money borrowed from investors) in your company, expecting to earn higher returns than the costs they have to borrow or raise their means. They will lose their investment if you don’t deliver the returns they expect from your business. Your risk of business failure is theirs.
2. They want to understand better the management team managing the money invested in your company.
This concept is difficult to grasp for many start-ups and small businesses. Many people believe their great products or business ideas are enough to make a business successful. It is impossible to be more wrong. A company is an organization that combines functional activities to achieve a specific goal. For the integrated activities to succeed, they must be managed by competent people within and outside the organization. Your bank manager must review your application to ensure your team has the necessary competencies. These are critical ingredients for success in the present and future. No matter how high-quality its products are or the benefits, it offers its customers, a poorly managed business will fail. This is why it is important to know that your bank or other funders will judge the quality of your management team based on their past performance. They will also seek evidence that your management team knows the market, industry, and business. If you’re a sole proprietor, having a couple of experts, whether virtual or real, is important to assure that the bank will not be exposed to unmeasured risks.
4. They need to be certain that your business model works.
You have considered all options and developed a viable business plan with reality. These will be tested by asking questions about areas that have gaps. You must provide credible answers to ensure their funds do not get exposed. Banks want positive returns on their investment in your company. They won’t compromise your shortcomings. The sooner you address the weaknesses in your business plan, the quicker you can raise funds for your business.
All four areas must be addressed in your business plan, regardless of who you are funding your business. These are just a few of the important points to keep in mind. You can read more articles on the subject. A concise, well-written business plan of 10-15 pages is sufficient. I have reviewed hundreds of funding business plans. You should include financial information on the first page. You should also stress-test the financial plan to determine if there are any variations in cash-flow projections. The bank will test this as part of its due diligence process. This is called sensitivity analysis.