Borrowers' Business Plans
Lenders typically request that borrowers, who are seeking to purchase a business or start a new business, provide a business plan as part of their commercial loan application. The business plan is typically the model to thoroughly understand the nature of one's business. It is important for the applicant to understand what the bank is looking for when reviewing the business plan. The complexity and size of the business may determine the amount of detail to put into the business plan. Much of what needs to be conveyed is the business owner's skill, experience, and capability in operating a business successfully and achieving set goals and profitability. This may be the most important aspect of the business plan.
A cash flow projection is normally included in the business plan. It presents the goals and objectives of the business as well as what will be done to achieve them. These activities will be reflected in the projected performance of the business using financial cash flow projections. The financial numbers will need to be presented to support the financial results and the assumptions will need to be realistic.
In addition to cash flow projections, if the borrowing is purchasing an existing business, it is necessary to obtain historical financial information (balance sheets, income statements and cash flow data) for at least the previous two years to compare to the cash flow projections.
Collateral is generally provided to secure the business loan and may consist of equipment, inventory and accounts receivable, and sometimes equity in personal or business real estate. In many situations the banker may ask for a government guarantee.
Business loans are most appropriate for existing enterprises that can show cash flow ability to service debt and collateral to secure the loan. For a start-up business loan request, the applicant’s character, as well as financial strength, are extremely important. Bankers generally are conservative and prefer that companies have as few of deficiencies as possible to minimize loan portfolio risk. In many cases, in addition to term financing, the use of a line of credit will be illustrated in the business plan to assist with operational cash flow requirements during business operating cycles.