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How To Write A Business Plan For A Loan

Written by: Pretha Yasmin

October 5, 2023

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8 min read

Having a well-crafted business plan can make all the difference when seeking out a small business loan. While not all lenders may demand one, a carefully structured business can impress lenders. This guide will explain how to write a business plan for a loan and what lenders look for when assessing a business plan.

What is a business plan?

A business plan is your vision laid out in a document that outlines your business goals, strategies, and financial projections. Business plans serve as a roadmap for your company’s future helping you start the business, expand your operations, or secure funding.

What are the benefits of a business plan for a loan application?

A well-structured business plan provides a comprehensive overview of where your business stands in the industry. This can help mitigate risks for lenders by outlining your financial projections, and your ability to repay the loan. A breakdown of how you plan to repay the funds demonstrates a strong level of transparency and commitment.

Things to include in a business plan

1. Executive Summary

An executive summary serves as a high-level snapshot of the entire business plan, helping lenders and investors quickly understand its essence and decide whether they want to explore it further.

  • Product/Service: Outline the core product/service, highlighting its unique benefits and features.
  • Location: Include the company’s geographical location or primary operating area, if relevant.
  • Employees: Provide an overview of the current workforce, including the number of employees and key team members.
  • Future Plans: Offer insights into the company’s direction and goals. This can include expansion plans, product/service diversification, or other key milestones.

2. Company Overview

A company overview is a description highlighting your business’s strengths and competitive advantages. A company overview should include:

  • Name & Logo: Provide a visual representation of the company.
  • Mission Statement: Explain company’s purpose, why it exists and plans to achieve.
  • History: Provide a brief description of the company’s founding, significant milestones, and evolution.
  • Products or Services: An overview of what the company offers, including its main line or best sellers.
  • Key Achievements: Highlight notable awards, achievements, or recognition the company has received.
  • Financial Performance: Summarize the company’s financial health including revenue, profitability, and existing debt.
  • Social Responsibility: Provide any information about the company’s commitment to environmental sustainability and social responsibility initiatives.
  • Partnerships: Mention any strategic partnerships, collaborations, or alliances the company has formed.

3. Industry Analysis

Industry analyses are often conducted by businesses to make informed decisions about investments, market entry strategies, and business planning. An industry analysis provides a holistic view of the industry’s moving parts and helps stakeholders understand where risks and opportunities lie. An industry analysis may include:

  • Define the Industry: Clearly explain the industry you work in and highlight past and current trends that have shaped the industry.
  • Industry Size & Growth Potential: Estimate the size of the industry and identify its historical and projected growth rates
  • PESTLE Analysis: Assess the external factors that can impact your industry such as Political, Economical, Social, Technological, and Legal.
  • Niche Down: Mention the niche segment of the industry your business serves.

4. Market Analysis: Broad Market vs. Niche Market

Broader Market: This refers to a large market encompassing a wide range of customers with varying needs, preferences, and demographics. Competition in a broader market can be intense. Marketing in a broader market requires a more generalized approach so it can be digestible for a diverse audience.

Niche Market: This refers to a smaller, specialized segment of a broader market, serving a specific group with distinct preferences or requirements. Niche businesses often face less competition since they serve a specialized market. Businesses targeting a niche audience can tailor their marketing materials to meet the specific aesthetics and preferences of their audience.

Opportunities of a niche market:

  • Expertise
  • Loyalty
  • Higher margins
  • Focused marketing

Risks of a niche market:

  • Market fluctuations
  • Limited growth

For Example

In the broader industry of luxury women’s handbags, you want to capture the niche market of eco-friendly handbags. Risks could be some new government regulations on imports that can significantly raise your production cost, whereas opportunities can be partnering with environment-conscious influencers to promote your brand.

5. Competitor Analysis

Small business owners can perform a competitor analysis to gain valuable insights on their rivals and improve their own strategies. Here’s how you can conduct a competitor analysis:

Identify your competitors: List your direct competitors- those that offer similar products/services to your target audience.

Pricing strategy: Study their pricing strategy. Consider what value they offer for their price.

Product comparison: Compare your products/services to theirs. What features of benefits do they advertise?

Customer experience: Analyze customer reviews. Look for areas where you can excel.

Marketing and advertising: Examine their marketing strategies. How are they positioning the product/service? Are they focusing on quality, affordability, innovation, or something else?

6. Target Market Segmentation

Target market segmentation means to divide big, diverse markets into smaller groups of people who share similar characteristics or needs. Here’s how to do it:

  • Define your target customers: Identify your ideal customer based on factors like age, gender, location, interests, and behavior. This will help you get a clearer picture of who you are trying to reach.
  • Understanding their needs and pain points: Get to know your target markets’ problems, wants, and needs. What issues do they face that your product/service can solve?
  • Sales approach: Outline how you will reach out to your consumers and sell your product. Will you have a physical or online store? Maybe both? Consider pricing, discounts, and customer support.

7. Services or Products Offered

After identifying your target customer’s needs and wants, describe how your product offers the solution to their problems. Highlight the unique features that differentiate you from your competitors. Clearly explain the benefits customers will gain from using your product/service compared to the competitors’. List any necessary equipment and materials needed to manufacture your products or provide services.

8. Marketing Plan and Sales Strategy

A marketing plan is the roadmap for a business to reach its customers. To attract new customers, the plan might include things like advertising, social media, and collaborations. To retain current customers, the plan can focus on excellent customer service and loyalty programs.

A sales strategy is how a business turns interested people into paying customers. It follows steps called a sales funnel:

  • Awareness: Make people aware of your product or service.
  • Interest: Get them interested in your offer.
  • Desire: Make them really want it.
  • Action: Encourage them to buy it.

Common challenges for marketing and sales teams include tough competition, changing customer preferences, and economic ups and downs. To tackle these, businesses can stay up to date, be flexible, and offer great value.

A well-planned budget can help achieve the goal of making more sales and revenue. This money can be spent on advertising, events, or online marketing. It’s important to use this budget wisely to get the best results.

9. Operations Plan

An operations plan lays out all the important things the business needs to do every day to run smoothly. It covers things like production, inventory management, supply chain, staffing, and more. Highlight any changes in the operations plan in the past that led to increased efficiency or sales. Explain if you have plans to use the loan amount towards streamlining operations for better efficiency in terms of reduced production time, reduced production cost, or such.

10. Management Team

Introduce the management team a let the lenders know what the major departments in your company are. Highlight the leaders of each department, their education qualifications, their work experience, and any notable awards or achievements in their career. Mention the owners and major stakeholders of your company. Organizational charts make it easy for investors and lenders to quickly glance and get an idea of the hierarchy structure in the company.

11. Financial Plan

The financial plan is the heart of your business plan as it tells lenders how much money you plan to spend annually and how much income you expect to generate. Lenders typically want to see a 3 to 5 year financial projection before approving a loan.

A financial projection consists of:

  • Sales Forecast: This predicts how much revenue your business can generate by estimating sales of your products/services.
  • Expense Budget: It outlines all your expected costs including operating expenses, salaries, and overheads.
  • Cash Flow Statement: This shows how much money flows in and out of your business and ensures you have enough to cover your expenses.
  • Profit & Loss Statement: This summarizes your revenue, costs, and expenses to calculate your profitability.
  • Balance Sheet: This provides a snapshot of your business’s financial health, including assets, liabilities, and equity.

Each part of the financial projection helps lenders understand your financial plan and assess the risk of lending to your business. It is a great way to demonstrate your business’s ability to manage finances and generate profits. If your business has been operational for a few years, it makes sense to include past financial statements as well for lenders to compare with your financial forecast plan.

12. Funding request

In this section of the business plan, you will disclose the loan amount you need, what you’ll use it for, and how you plan to pay it back. You may also offer collateral to offer as a backup in case you cannot pay back the loan.

It is also important to mention if you expect to need more money in the next five years and how you plan to get it. This helps lenders understand your financial needs and strategies for the future.

13. Exit Strategy

An exit strategy in a business plan is the backup plan for worst-case scenarios. It’s crucial for borrowers to have a contingency plan in case their business doesn’t succeed as planned. The exit strategy will answer how you plan to repay existing debts to lenders, vendors, and distributors in case of an emergency. This can include options like selling the business, closing it down, or declaring bankruptcy. This provides your business with a clear oath for handling unforeseen circumstances and ensures lenders you have a plan in place to protect their investments.

14. Appendix

An appendix in a business plan is where important documents are kept. Add an appendix at the end of the business plan in the form of a table of contents. The appendix should include financial documents such as income statements, balance sheets, and essential business documents.

What Lenders Look for In a Business Plan

A lender closely examines what’s often referred to as the “5 Cs” – Character, Capacity, Capital, and Collateral to determine if the business qualifies for the loan.

Character

Lenders evaluate a business owner’s character by assessing their personal and business credit history, business experience, educational background, and overall reputation. These factors help lenders gauge the individual’s honesty, integrity, and reliability in meeting financial commitments. Be sure to add letters of recommendation and references who can vouch for your ethics and character

Capacity

Lenders assess your capacity to repay a loan by examining your personal and business debt history, as well as your financial projections. They evaluate your ability to generate sales revenue and manage capital expenditures.

Capital

Lenders pay close attention to the amount of capital you have already invested in your business because it demonstrates your financial commitment to its success. Your personal investment shows your belief in the business which can instill confidence in lenders.

Conditions

Lenders look at your business’s position relative to your competitors, the demand for your product/service, and your ability to attract new customers in the current market conditions.

Collateral

Lenders examine the collateral you have offered to judge whether it is enough to cover the loan plus the interest in case of a loan default.

Invest in Yourself

Investing time for creating a business plan for a loan demonstrates your commitment and equips you with the tools to navigate the challenges and opportunities. Whether you’re seeking funding or striving for business growth, remember that a well-prepared business plan can be your most valuable asset on the road to entrepreneurial success.

About the Author

Pretha Yasmin

Pretha Yasmin is the consumer analyst for SmallBusinessLoans. She has more than five years of experience in marketing and studying consumer behavior for a wide range of industries including finance, construction, and hospitality. She holds a Bachelor of Business Administration in marketing from Brooklyn College.

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