How To Write a Business Plan for a Loan: A Guide
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Many small business owners know that it can take money to grow. But what does it take to secure that funding? A strong business plan is often a part of the answer. That’s why learning how to write a business plan for a loan may be an important part of setting up a small business for success.
A good business plan helps a lender assess a business’ prospects. There is a standard format that owners may wish to follow. Keep in mind that applying for a loan is an important step that has legal consequences. As you put together your business plan, consult your professional advisers to make sure that you understand the importance of providing accurate information.
Here are some pointers on writing a business plan for a loan to help grow your business.
Why is a business plan important when you’re applying for a loan?
The Small Business Administration (SBA) describes a business plan as a “roadmap to small business success.” Given all the challenges of keeping a small business thriving, a roadmap is a handy thing to have. A business plan helps an owner visualize the future, take the actions needed to get there, and understand when to change strategies.
A business plan is also often required when applying for a business loan. Lenders often use an applicant’s business plan as part of the loan application and approval process. It helps the lender evaluate the likelihood of the small business being profitable.
Knowing how to write a business plan can also be helpful for other purposes. Commercial real estate landlords may ask for a business plan before leasing a space. A thorough business plan may also help with finding investors.
What lenders look for in a business plan
A lender typically evaluates several factors to decide if a small business is likely to repay requested financing. The various sections of the plan will help the lender decide if a market opportunity for the company exists, if the business has access to the organizational and managerial resources it needs, if the product or service appears viable, if a marketing plan exists, and if the small business’ finances are healthy. Simply put, the plan helps the lender review all aspects of the business on paper, so that the lender can make a more informed decision about making a loan.
In addition to the business plan, the lender will likely assess the company’s accompanying business credit reports and business credit scores to determine its creditworthiness.
What does a formal business plan include?
Many business owners have informal business plans from when their small business was just a side hustle. Business ideas written on the back of a napkin are a cliche for a reason: it’s a common way for a small business to take shape.
A formal business plan, however, can’t fit on a napkin. When a growing small business needs a sizable business loan or line of credit, they will likely need to provide something quite detailed to a lender. The need for a formal document doesn’t necessarily mean it will be difficult to secure the loan, however. It just means the lender needs a clear picture of the business.
Small business owners can think of a business plan for a loan application like a resumé when seeking a job. It helps a lender decide if the small business is a good candidate for a loan in an easy-to-read document. Similar to a resumé, the business plan should be professional looking and free of spelling, grammatical, and typographical errors.
The list below follows the naming conventions and structure of how to write a business plan for a loan application according to the SBA. It includes:
- Executive summary
- Company profile
- Market analysis
- Organization and management
- Service or product line
- Marketing and sales
- Funding request
- Financial projections
- Appendix
1. Executive summary: Spark interest in your business
The executive summary may be the first thing a lender will read, but small business owners may be best served by writing it last. Learning how to write a business plan for a loan may help owners understand their own business better. The executive summary will likely be most accurate after the owner has thought through, and learned from, all the sections to follow.
What is the executive summary?
The executive summary is a brief overview of the business plan. It should give readers a high-level description of the business, as well as the high points of the business plan.
What to include in an executive summary
An executive summary should include the following:
- Business name, contact information, and social media profiles: This will help the reader find the business in the real world.
- Mission statement: A mission statement should directly reflect the values of the business to help readers understand why the business exists.
- Product or service description: This highlights what customers can expect from the business.
- Demographic, economic, and financial factors affecting the business: Readers should understand the general environment in which the business operates.
- An analysis of competitors and the primary market: This previews the market analysis section and clarifies the business’ market position.
- Marketing, public relations, and sales plan: Readers should understand how the business plans to attract and retain customers.
- Future revenue and cash flow projections: Financial forecasts help readers understand the business’ potential for growth and profitability.
- Any current assets or capital: Lenders will want to know what potential collateral the business has.
2. Company profile: Define the business
A company profile is a business owner’s opportunity to briefly explain what their business is all about and why it exists. The profile should be heavy on facts, including what the products and services are, the target audience, and what needs the business fulfills. It should be written in a formal tone and explain what, if anything, makes the business unique.
3. Market analysis: Competitors and customers
A market analysis explains the business environment in which the company will operate. Lenders may look at this section to determine if the business has a good understanding of its competition and potential customers. You may want to consider hiring a market research firm to help you prepare a market analysis.
Market analysis elements include:
- An industry analysis: This describes the outlook for the industry to which the business belongs.
- Knowing your competition: A competitor analysis highlights the strengths and weaknesses of similar businesses in the same market to identify challenges and opportunities.
- Know your niche: Explain how the product or service addresses an unmet If your business has a significant social media following, that may help to show how your business is reaching your customers.
4. Organization and management: Talent and experience
Who will run the business? This section is meant to help lenders understand the experience and skills of those operating the business. It’s not uncommon for lenders to ask if the talent that has made a business successful so far will stay with the business as it grows. Including a description of the current and future business structure over the next three to five years may demonstrate room for growth for valuable staff members.
5. Service or product line: What makes the business special?
A description of the small business’ service or products helps highlight what makes the business unique. The nuts and bolts of these offerings are critical, but their intangible qualities are valuable as well. This could include the recent hiring of an up-and-coming chef, the development of a new, patented product, or an innovative production method. This section is an opportunity to drill down on what makes the business unique.
6. Marketing and sales: How do you get the word out?
A great product or service is only valuable if enough potential customers hear about it. A lender will want to know how the business plans to get the word out about its offerings and increase its share of the target market. The plan might include social media platforms, established business partners, and how the company will generate and nurture sales leads.
7. Funding request: How much does the business need?
A business plan is all about clarity. Small business owners may use this opportunity to clarify how much money they need and why they need it. Lenders value a detailed explanation of how the business will use the loan and why it will increase their revenue or net profits.
8. Financial projections: Dollars and cents
Naturally, lenders will want to know about a business loan applicant’s finances. When learning how to write a business plan for a bank loan, business owners should understand the critical role of financial reports.
When preparing financial projections, it may be wise to consult a professional to best help your business prepare your documents accurately. Financial projections may include the following documentation:
- Startup expenses
- Payroll costs
- Sales forecast
- Operating expenses
- Cash flow statements
- Income statements for the first three years of business
- Balance sheet
- Break-even analysis
- Financial ratios
- Cost of goods sold (COGS)
- Amortization and depreciation for your business
9. Appendix: Show instead of tell
The appendix is where a business owner can show their work. The appendix includes supporting documentation, including resumés, financial statements, media clips indicating buzz around a product or brand, or anything else that verifies the information shared in the previous eight sections.
A formal business plan can be important when applying for a business loan
Seeking financing for business growth is a great opportunity to move from an informal business plan to something more structured. Having a business plan ready for lenders is a great first step in securing the funding your business may need to grow or sustain operations.
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