A business plan serves two essential functions. First and most important, a guide to a company's operations by charting its future course in devising a strategy for following. The second function of the business plan is to attract lenders and investors. Applying for loans or attempting to attract investors without solid business plan rarely attracts needed capital. Rather, the best way to secure the necessary capital is to prepare a sound business plan.
Basic elements of the business plan
- executive summary
- Mission statement
- company history
- business and industry profile
- description of the Company's business strategy
- profile of its products or services
- statement explaining its marketing strategy
- competitor analysis
- owners and offer servers résumés
- plan of operation
- financial data
- loan or investment proposal
Three tests every business plan must pass
- Reality test. The external component of the reality test revolves around proving that a market for the product or service really does exist. The internal component of the reality test focuses on the product or service itself.
- Competitive test. The external par of the competitive test evaluates the companies relative position to its key competitors. The internal competitive test focuses on the management team's ability to create a company that will gain an edge over existing rivals.
- Value test. To convince lenders and investors to put their money into the venture, a business plan must prove to them that offers a high probability of repayment or an attractive rate of return.
Business plan presentations
Lenders and investors are favorably impressed by entrepreneurs who are informed and prepared when requesting a loan or investment.
Tips include
- demonstrating enthusiasm about the venture but not being overly emotional
- "hooking" investors quickly with an upfront explanation of the new venture, its opportunities, and anticipated benefits to them
- using visual aids
- hitting the highlights of your venture
- not getting caught up into much detail in early meetings
- avoid the use of technological terms
- rehearse the presentation before hand
- close by reinforcing the nature of the opportunity
- be prepared for questions
The five C's of credit
- Capitol. Lenders expect small businesses to have an equity base of investment by the owner that will help support the venture during times of financial strain.
- Capacity. A synonym for capacity is cash flow. The bank must be convinced of the firm's ability to meet its regular financial obligations and to repay the bank loan, and that takes cash.
- Collateral. Collateral includes any assets the owner pledges to the bank as security for repayment of the loan.
- Character. Before approving a loan to a small business, the banker must be satisfied with the owner's character.
- Conditions. Conditions such as interest rates, the health of the nation's economy, and industry growth rate surrounding a loan request also affect the owner's chance of receiving funds.
