The decision to expand your business, purchase a new building or a piece of machinery is no doubt a big decision for a business owner, especially when deciding to use your own resources or borrow from a bank. In today’s regulatory environment, banks are no longer lending based on the collateral; they are focusing more on the business history, the owners, their future plans and how they plan to repay the loan.
“A business plan is an excellent way to tell bankers about the story behind the numbers and let them know you have a good handle on the future of your business,” says Betty Uribe, executive vice president for California Bank & Trust.
Smart Business spoke with Uribe about how to develop a business plan to increase your chances of obtaining a business loan.
Why are business plans important to lenders?
Just as a builder utilizes a blueprint to build a structure, and travelers use a roadmap to get to their destination, business owners must use a well-thought-out business plan to dramatically increase their odds of succeeding. When presenting a loan package to a lender, an organized, well-thought-out business plan can make the difference between getting the loan and getting a decline letter in the mail.
A business plan will:
- Show the lender if the business has a chance of making a profit and in what amount of time.
- Provide a well-thought-out estimate of how much the business needs to grow.
- Convince the lender to fund your business.
- Define the business market, the customers and the percentage of the market the business plans to reach, hereby providing a clear revenue estimate.
- Show the lender potential issues, and how the borrower plans to address them.
What are the steps involved in creating a good business plan?
First, start with an outline and fill in the blanks as you learn more about the process. Keep in mind that your plan should be only as big as necessary for your firm to run smoothly. In fact, the outline alone may suffice, particularly if you are not submitting the plan in a package to obtain financing.
There are many tools to consider when embarking on your business plan. Many seasoned entrepreneurs like to calculate a break-even analysis to predict future viability in their respective fields. In a nutshell, this is a formula based on the relationship between revenue, fixed costs, variable costs and profit. The analysis can show you how much money you must bring in to stay solvent.
Another preliminary tool is a feasibility plan, a basic document that features a summary, mission statement, market analysis and required success factors. It also might include an initial cost analysis addressing pricing and potential expenses. A feasibility study is yet another vehicle to help you determine whether starting a business can work for you.
What resources are available to help business owners develop a business plan?
An abundance of business planning software is available with some programs costing less than $100. Designed to help strategize, sort and calculate related financial data, these products also generate high quality tables and charts with just a few keystrokes. Plenty of free information is available on the Internet, too, but choose this material wisely. When in doubt, consult your business bankers; they will be happy to provide the right resources and guide you through the process.
Agencies such as the Small Business Administration (www.sba.gov) and SCORE, the Service Corp of Retired Executives (www.score.org) offer detailed information on developing a solid business plan.
In additon, through TEAM (Tools, Education, Access, and Mentoring at www.calbank trust.com/team) California Bank & Trust offers a full scope of tools and information to help businesses get started and succeed. Our Business Resource Center (www.calbank trust.sbresources.com) is another valuable source of information for business owners.
How do you get started?
Most experts outline 10 key components for a basic business plan. Key components include:
- Cover sheet
- Table of contents
- Executive summary
- Company description
- Product or service description
- Market analysis
- Strategy and implementation
- Time table
- Management team
- Financial analysis
What should a buisness owner do with the business plan once it’s written?
- Start by recording overall business or long-term goals on a spreadsheet.
- Set the bar high enough to grow.
- Make sure your goals are S.M.A.R.T. Specific, Measurable, Attainable, Relevant and Time-bound. They must be easily identified, quantified and understood by you and your management team or you won’t know when you reach them.
- Set quarterly, monthly, weekly and daily objectives, then record your progress.
- Do not share or discuss goals with negative individuals. They get in the way of progress.
- Regularly ask yourself, ‘Does this decision take me closer to or further from my goal?’
Once the business plan is established, what else can business owners do to help grow their business?
Growing a business takes commitment and systematic planning. Educate yourself. The more you learn about your industry, competitors, finances and time management, the greater your chances of success.
Betty Uribe is an executive vice president of California Bank & Trust. Reach her at firstname.lastname@example.org.
Insights Banking & Finance is brought to you by California Bank & Trust
The latest data from the Federal Deposit Insurance Corp. shows that a permanent shift has occurred in the lending environment. Although overall commercial and industrial lending by banks has increased for five straight quarters, loans to small businesses with $1 million or less in annual revenue have been shrinking since June 2008.
Unless business owners make a concerted effort to understand underwriting requirements and adapt their approach, they will have a hard time securing capital at fair prices.
“Owners can no longer submit a loan package and wait for approval,” says Betty Rengifo Uribe, executive vice president of the Business and Personal Banking Division at California Bank & Trust. “They have to be engaged in the process and breathe life into their numbers, so bankers have enough information to approve their loan.”
Smart Business spoke with Uribe about the changing lending climate and why executives must adapt their strategy to secure a business loan.
How has the lending climate changed?
Bankers have to comply with a host of new regulations and stringent underwriting standards that have permanently shifted the way we consider and grant business loans. We do not rubber stamp applications — we want to hear the story behind the numbers, get to know applicants personally and even tour their facilities. For example, it’s not enough to understand the business and its customers’ needs; bankers need to understand the customers’ customers to validate the revenue projections and ensure the ability to service debt. We want to know how the economy has impacted the industry, how the business has adapted its strategy and why the company will be successful in the future. Of course, having an inside look at the business not only provides loan officers with the confidence to recommend the loan package, but they’re more likely to lobby on the borrower’s behalf when the loan comes up for approval.
What’s the best way to research the market and identify a prospective lender?
Start by researching prospective lenders on the Internet before requesting an appointment with a loan officer. Ask about the banker’s background and experience to ensure that the lender or branch manager has the knowledge, interest and enthusiasm to earnestly evaluate your business request. Move on if a banker seems lackadaisical. Make sure they have the expertise in your industry and can add value to your business. If they have the business expertise, they will be poised to help your business grow.
What should executives bring to the initial meeting?
Provide a framework to support your loan request by bringing an introductory memo or business plan that describes the history of your company, the profiles of your management team, a summary of your capital needs and the purpose for the funds. Also, bring copies of your tax returns covering the last two to three years and perhaps provide the contact information for your CPA or CFO so he or she can answer the loan officer’s questions and validate the efficacy of your financial assumptions.
How do lenders evaluate a borrower’s credit worthiness utilizing the 5 Cs?
Bankers consider these five characteristics to evaluate the creditworthiness of potential borrowers.
? Character: Reviews the owner’s and the company’s reputation as well as the thoroughness of the loan package.
? Capacity: Measures the borrower’s ability to service debt from current cash flow by reviewing a summary of monthly non-discretionary payments. Normally, lenders look for combined personal and business cash outflow to be no more than 40 percent of the cash inflow.
? Capital: Considers the borrower’s equity along with his or her initial investment. Remember, a banker will be more willing to invest alongside borrowers who invest in their own company.
? Collateral: Contemplates secondary sources of repayment should the business struggle financially, such as the ability to liquidate receivables or inventory, stocks and bonds or other assets like real estate.
? Conditions: Examines the industry’s stability, trends, competitive environment as well as other external factors that influence business success, including the overall economy.
What should owners include in their business plan?
It’s fine to use a template as long as your business plan covers the history of your company and provides an in-depth trend analysis covering the last three years. A brief bio of all key management members is always a good idea to include. This shows the lender that you have a solid management team with the expertise to grow your business. Loan officers want to hear about the obstacles you’ve faced and how you’ve overcome them, since resilient and resourceful executives will probably succeed in the future. Finally, provide a financial forecast and describe your plans for the next two years.
Are there other tips that can help owners navigate the lending process and secure a business loan?
Get to know the loan officer, underwriter and branch manager because each one plays an important role in approving your loan. Request a list of required forms and documents and submit everything at once. Don’t raise red flags by omitting answers in the loan application; just insert N/A if the question doesn’t apply. Finally, follow up at every stage of the process to make sure your request is being considered.
Betty Rengifo Uribe is executive vice president for the Business and Personal Banking Division at California Bank & Trust. Call (800) 400-6080 to reach the branch nearest you or visit www.calbanktrust.com to learn more about California Bank & Trust.