How Do Business Plans Help with Business Credit?

Many small business owners have been misled regarding the importance of business plans and what role they play when it comes to business credit.

Unfortunately, there seems to be this preconceived notion that business plans are only needed when seeking funding from a venture capitalist, angel investor or other source of private capital.

WRONG!

Nothing can be further from the truth. It’s like building a home without using any plans or blueprint. Imagine believing that because you have all the materials, laborers, and tools needed to build a home you figure why do we need the plans? Let’s just start building away!

A business plan is your blueprint that outlines every necessary component for the success of your business. How can you expect to build your business without a plan? The SBA (Small Business Administration) concluded that small business owners who have business plans are far more successful than ones that do not.

If you decide to approach a banker for a loan for your business, your loan officer may suggest a Small Business Administration (SBA) loan, which will require a business plan. When applying for a business line of credit or bank loan your bank may not require a business plan, but it will look much more favorably on your application if you do supply one.

Here is ‘10 Reasons Why You Should Have a Business Plan’

1. Supports a loan application
2. To raise equity funding
3. Define objectives and describe programs to achieve those objectives
4. Compete in the marketplace (through an analysis of what your competition lacks)
5. Make money from the start by devising an effective marketing strategy
6. Provide a revenue estimate (by defining your market — that your customers will be — and the percentage of the market you can expect to reach)
7. Define agreements between partners
8. Set a value on a business for sale or legal purposes
9. Evaluate a new product line, promotion, or expansion
10. Determine whether your business has a chance of making a good profit

What’s in a business plan?

A business plan should prove that your business will generate enough money to cover your expenses, but a business plan may vary depending upon who your target audience is.

If you are writing a plan for your associates and partners, for example, to expand an existing business, then the focus of that plan may be more on the operation side than it will be on the financial side. This plan would show your partners how the expansion will mean more revenues, but they are going to want to know the nuts and bolts of how this new venture is going to be implemented.

If you are writing a business plan for your bank, your bank manager will want to see that your ideas are well thought out, but the most important aspect to him or her will be your financials. Are your projections realistic? And will the cash flow of the business be enough to ensure that you can make the monthly payments for the loan that you have requested? If your business is making $1,000 a month and your payments are $1,200 a month, the bank is likely to reject your application.

When considering an investment opportunity, most venture capitalists will look at the obvious trends and market niches. The most important factor in a decision to invest in a company is the quality of the people. In real estate, the three biggest factors are “location, location and location.” The venture capital factors are “people, people and people.” VCs will ask, how experienced are the people that are going to run this business? Do they have knowledge of the industry? Have they started successful businesses in the past?

A great business plan accomplishes two main objectives:

• It provides you a blueprint for building your business including but not limited to product development, target marketing, operations, and revenue projections                                                                                            
• Shows bankers, venture capitalists, and angel investors that you are worthy of financial support.

Your business plan is your business blueprint and like a calling card for business credit, it will get you in the door when you’ll have to convince investors and loan officers that you can put your plan into action.

You want your calling card to look impressive, so make sure your business plan is printed out on good quality paper, you have checked the spelling and grammar and that your numbers add up. Anyone who sees errors while reading your plan will wonder whether you are going to make similar errors in running your business.

Make sure that your plan is clear, focused and realistic. Then show them that you have the tools, talent and team to make it happen.

Marco Carbajo is founder of Start Business Credit.com

You may contact Marco directly at: ceo@startbusinesscredit.com

Follow Marco on Twitter @MarcoCarbajo and read more of his insights on BusinessCreditBlogger.com