If a bank does get involved with a start-up business, they seek enterprises that adopt a tried and tested approach to doing business, such as a franchise. Banks may however be willing to fund certain assets for a start-up business, such as plant and machinery, and they will also be willing to provide capital to a small business that wants to grow.
When developing a business plan for a bank, the three most important things to focus on are:
1. Risk mitigation.
Bankers granting a loan to any organisation want to know that they are minimising their risk. They are not looking for the hefty returns demanded by VCs, but they are looking for assurance that the loan they grant will be paid back with the requisite interest. They also seek to make loans where they will have an opportunity to recover the value of the loan with the sale of assets or surety if the company does fail.
Therefore, if you are preparing a business plan for a bank, focus first and foremost on risk mitigation. Make the venture seem as safe and solid as possible, address issues of risk and have risk mitigation strategies highlighted in the plan.
2. Cash flow.
For a loan to be repaid, a business needs to generate cash flow. Bankers will therefore pay a great deal of attention to the cash flow forecasts of a business. They will ask themselves these questions:
- Are the assumptions underlying this forecast reasonable?
- What is the probability of this forecast coming true?
- What is the worst-case scenario?
That’s why you need to focus on creating strong assurances around cash flow forecasts in developing a business plan for a bank.
3. Familiarity, understandability and verifiability.
To feel comfortable providing a loan to a new business, a banker has to recognise and understand the proposed operation of the new business. The more radical or disruptive your ideas, the less likely they are to look favourably on the venture. In a business plan for loan funding use recognisable examples and familiar language to explain what you are doing.
Bankers also like things that can be verified, such as reference to a commitment for a long-term customer contract – if they can see a signed copy of the contract and corroborate it with the customer, all the better for the entrepreneur seeking the capital.
Therefore, as you prepare a business plan for loan funding make sure that all the key elements of the business, described in the plan, are familiar and recognisable to a banker, help them understand the business and provide verifiable evidence for what you say wherever possible.