When it comes to writing effective business plans for bank loans, experts agree that manufacturers consistently make the same mistakes – and they aren’t always what you might expect.
“An advanced plan isn’t just a bunch of numbers,” says Adrian Rudzikas, a business consultant at Business Plans Canada in Gibsons, BC. “We see a lot of mistakes; it doesn’t matter what size the business is, we find it has more to do with the years of experience a person has had running the company – a new entrepreneur may be sitting on a multi-million dollar company and still have a hard time putting a business plan together.”
Rudzikas says that the most common mistake is not to build the financials in such a way that you can easily answer all of the bank’s questions. This can be tricky, because you have to be prepared for the differing criteria of the various banks.
“Each bank may analyze a concept in a different way,” says Rudzikas. “For example, on a recent project of mine the bank wanted to see all the company’s financial ratios – working capital ratios, equity ratios – but this won’t always be the case.”
Not surprisingly, Rudzikas spends most of his time working with clients to make certain they cover all the bases. This means a solid financial statement with income and profit – ideally with increasing monthly cash flow – so that you are ready for any line of inquiry.
“You have to be prepared for any question,” says Rudzikas. “That’s the most important thing. You also have to put yourself in the position of the banker – they want to see someone who is enthusiastic and confident.”
The importance of planning
Getting it right means taking some time. And though the financials are crucial, a business plan requires emphasis in the right places – anything else puts the manufacturer in a poor light, and reduces the likelihood of a successful application.
“The biggest single problem I run into is that people tend to go into too much detail in the wrong places,” says Skip Green of Alden Green Financial in Oakville, Ontario. “Banks are trying to find out certain things quickly in order to analyze a particular deal.”
Green notes that banking has changed significantly in the past 10 to 15 years, with account managers trying very hard to understand their customers’ businesses. This means looking beyond the numbers.
“They need to know how the business is structured,” says Green. “Who owns the business? Who do they contact if they have general questions? They really need a general sense of how the business works and who the customers are.”
The social relevance of positioning a business plan to appeal to a banker is not lost on Murray Carlson, a professor of finance at the Sauder School of Business at the University of British Columbia in Vancouver.
“You really have to do your homework to educate the banker who is sitting across the table from you,” says Carlson. “What your company is, what it does, and why it can expand, no one knows that better than you – don’t undersell.”
Rudzikas from Business Plans Canada agrees with Carlson, and makes the additional point that a well researched and thought out business plan can provide ongoing benefits to your business.
“It is important to be accurate and show the true story – if you do it quickly you won’t get the attention you deserve,” says Rudzikas. “Yes, the business plan is for the bank so that you can raise the money you want, but the plan is also an asset for the business itself and can function as a base for running operations over the coming years.”
Rudzikas says that some manufacturers will go to the bank when they are in the middle of the first draft, before all the financials are in place. But not showing up with all the information can leave a bad impression. And, according to Skip Green from Alden Green, it can cost you in the end.
“I will sit down with an account manager and look over the plan,” says Green. “These days the manager no longer approves the deal – it all goes downtown, wher it is analyzed and then recommended. I will assess with the account manager, and sometimes we’ll defer sending in a client’s application in order to ensure a higher likelihood of approval.”
There are good reasons for this approach. The relationship with the account manager is protected, because you are respecting his or her time and reputation, and ensuring a higher likelihood of success. As well, if you are shopping around in an undisciplined way you could start knocking points off your credit score.
Under your control
All the focus on financials and correct execution can steal the spotlight off of some of the important social dynamics inherent in putting together a successful business plan.
“Don’t forget the people side,” says Carlson from the Sauder School of Business. “Bankers don’t only care about numbers; you are also establishing a relationship.”
Carlson notes that a banker will take great satisfaction in finding a business that will do well.
“What makes their day is a relationship with a company that results in a small-size organization becoming mid-size, or mid- size to large. That flowering means a lot to someone who is lending money.”
Carlson adds that showing a business character will serve your interests. Looking at competing financing options and acting in the best interests of your company will reflect well on you.
“Your character is important,” agrees Martin Povey, a business consultant in Medicine Hat, Alberta. “The bank assesses the trustworthiness of the potential borrower on more than credit history: there is also overall character, business experience, knowledge, and personal business acumen.”
But Povey concurs that charisma alone won’t do it: if you have no credit history, and limited experience or education, you won’t stand much of a chance of getting a loan. For Povey, character is just one of the “five Cs” that the banks look at, the other four being capacity, collateral, capital, and conditions. Capacity is simply the business’s ability to pay back the loan, and collateral and capital address an individual’s ability to secure the risk. Borrowers may not have much control over these factors, but they can add unique insight into conditions.
“You can play an important role in educating the bank on your business and industry,” says Povey. “Banks will have well-rounded specialists, but for specific industry issues they may have to bring in a consultant, and of course they’ll listen to you, too.”
The consultant will look at external conditions such as the customer base, dependence on one or many customers, the state of the competition, and liabilities. These areas provide an opportunity for you to contribute your unique understanding of the market, and to explain why you are well-positioned to benefit from the loan.
Practical tips
Some tips are purely practical.
“You can deliver the correct amount of detail with 15 to 17 pages of information,” says Green. “Every business plan needs an executive summary, which many people don’t know how to write and a mission statement, as well as a small marketing section and some detail on the nature of the business, but stick to financials – if you are offering product details they won’t be interested.”
Any overly-technical details will be lost on the banker. What they do want to see is fallback, which is essentially what management can rely on if they don’t make their numbers. Some of the pitfalls that Green sees are almost comic – like forgetting to add your contact information.
“I see a lot of business plans, and most of them are of extremely poor quality,” he says. “You need to put your name and phone number on the plan – this is silly stuff, but these are the biggest complaints I hear from bankers.”
Of course, the sources for this article are all in the business of assisting companies to write business plans to get loans. It is only fair then to suggest that an external consultant could be considered in an advisory role. They have contacts in banking and can smooth the process.
Business Plans Canada, for example, has a separate website at Interactivebusinessplanner.com that can walk you through the planning process at no charge. And Mr. Povey’s website at Buildingyourbusiness.ca offers links to a wide range of free resources. CM
Tim Wilson is a freelance writer based in Peterborough, ON and a regular contributor.
