If you are looking to raise substantial capital for your privately held business, you need a competently prepared business plan. You must convince the lender that your business is capable of repaying the debt, through principal pay-downs and/or the issuance of publicly traded stock to the lender.
Here’s what Robert Krummer Jr., chairman of First Business Bank in Los Angeles, said about this situation:
“The business plan is a necessity. If the person who wants to start a small business can’t put a business plan together, he or she is in trouble.”
Definition of a Business Plan
This article will give you the essentials of a business plan — the elements that must be included. It will not give you every detail about a business plan. However, you can get much more information on the subject. I recently did a Google search on business plans and I came up with 3,260,000 results!
There’s plenty of help out there. Your main challenge will be to garner essential information and incorporate it into your plan. You can always embellish this with other information as you see fit.
My definition might be a bit different than most you will see. Here it is: A business plan provides the reader with the present status of your company, where you want it to go, and how you intend to get it there.
Within this plan, you must show the current financial condition of your business and how your present financial picture will change over the next five years.
The purpose of a plan is to demonstrate to a lender that you have a complete, clear and conservative economic vision of your business. It should give the lender comfort that you will safely be able to repay your loan at some future time. Therefore, it must include what you want to borrow, why you want to borrow it, and how you will use the proceeds.
Basic Elements of a Plan
Now let’s look at the components of your plan.
- Description of Your Business. Although you should compose a complete description of exactly what your business is about, don’t make it too technical. Be sure that the reader, after having read it, will have a firm grasp of your business and how it serves its customers/clients.
- Competition. Clearly describe who your competitors are and which of them dominate the field. In other words, let’s say that you have 10 major competitors. Perhaps one or two of them control 60 percent of the revenue in your field. Explain how and why the dominant competitors were able to garner such a piece of the pie. Then, show how you intend to make inroads on your competition. Be sure to be conservative and realistic.
- Marketing. This section should provide a detailed description of the marketing techniques that will bring your company to your desired annual sales levels. It should demonstrate to the prospective lender that you are not only serious about expanding your sales base, but that you also have the requisite techniques to do so.
- Personnel. Here you should describe your management team. Include resumes of all of the principals. You should also list other employment categories (production/sales/administrative) and how many individuals you have in each category. Of course, show your total employment numbers.
- Financial Data. Here you must show your present financial position (balance sheet) as well as your present income statement. You must then prepare pro-forma financial statements. These statements (both pro-forma balance sheet and pro-forma income statement) are the accounting equivalent of budgets. They will show where you are going financially. Additionally, you should prepare pro-forma cash-flow statements. These statements are critical to the lender in that they portray the stream of cash going into and out of your business and the projected balances thereof at certain points in time. In all of your projections, you must be able to support why you think that you can achieve certain levels of sales and why you think that you can control the outlays of expenses to keep them within the parameters of the pro-forma statements.
Keep in mind that your investor wants to be assured of repayment of the loan. You have to convince him/her that you will use the money in a prudent fashion and that the money lent to you will permit you to generate future cash flows with which you will pay back the loan.
I mentioned earlier about repaying the lender with publicly held stock. This is certainly an option and can give the lender a greater return on his/her money than if you were to repay your debt in cash. (Clicking on this link will take you to all of my E-Commerce Times articles. There you can easily pick out my articles on IPOs and going public.)
Keep the Basics in Mind
Also, keep in mind that as part of the process of impressing a prospective lender, you must show that you have a sound management team. Part of that team is your board of directors. (Please see my recent article on selecting a board: Choosing Your Board of Directors.) Your corporate officers and your board of directors should inspire lender confidence. It is especially important to show that you have an independent board of directors.
When you are drawing up your business plan, don’t be intimidated by the task. For the financial portion, you can go to your CPA. For the portion on competition and marketing, you can reach out to a competent and respected marketing person who is thoroughly conversant with all of the ins and outs of your business. Remember, as I said above, that there is a lot of data on business plans on the Internet. There is so much, in fact, that you have to be quite selective so as not to get lost in the details.
Finally, remember that the basic purpose of your plan is to demonstrate how much money you need, why you need it, and when your lender can expect to get it back. Keep the plan simple, but complete, and realistic. With a good business plan you’ll be able to convince your lender to have confidence in you and your company and to lend you the money.
Go for it. And, good luck!
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public. He also is a frequent speaker on the subject of financial advice for small businesses as well as the IPO process. He can be contacted at [email protected].