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Whether you want to buy equipment, expand your business or get working capital to carry you through a slow season, a business loan can make it happen. Many lenders, especially traditional banks and Small Business Administration (SBA) guaranteed lenders, will ask you to submit a business plan as part of your loan application. To make a business plan for a loan, you need to know how much money you're seeking, how you will use it and how you expect it to benefit your business. Here's a closer look at what's involved in writing a business plan that will help you land a loan.
What Are the Types of Business Plans?
- Business plan for a startup business: When you need a loan to get a new business off the ground, a well-written startup business plan can help persuade lenders you've got what it takes to succeed. Writing a business plan also helps you identify all the steps to startup, providing a useful road map to guide you in launching your business. Sharing your in-depth market research, touting your experienced management team, and offering strong financial and sales projections will help to convince lenders your startup will quickly turn a profit so that you can repay the loan.
- Business plan for an existing business: Are you already in business and looking for a loan or other financing to expand into new markets or products, purchase equipment or tap into working capital? Depending on where you're applying for a loan, you might need to write a business plan as part of your application. This type of plan shares hard data about your business's current success as well as forecasts for how the proposed loan will help you achieve continued growth and meet future financial goals.
- Business plan for an acquisition: You'll likely need financing to buy an existing business. A business plan for an acquisition should present the history, strengths and financials of the business and explain how you'll make the business even more successful. If you already own a business, your business plan should also discuss that company's market, management and finances, and explain how the acquisition will enhance your current operation.
Although some lenders won't ask for a business plan, traditional lenders typically do. Think of writing a business plan as the price you pay to access the favorable business loan terms and lower interest rates available from banks and SBA-guaranteed lenders. Before extending credit, these lenders want to be confident that your business or business idea is sound and will generate the profits you need to pay them back.
How to Write a Business Plan for a Loan
Your business plan should convey what makes your business unique, how you operate, who your customers are, how you make money, who makes up your leadership team, and how the business fits into the competitive landscape. It should also provide details of your business's finances and financial projections. To cover all these topics, most business plans include the following sections:
- Executive summary: This brief introduction summarizes the most important aspects of your business plan in an attention-getting format, inspiring lenders to read on for more details.
- Company description: Here, you explain your product or service, your company's legal form of business (such as a corporation or partnership), business history and the competitive landscape.
- Product or service description: This section provides details about what you sell. Explain what makes your product or service different and better than the competition, why people will buy it and how it's priced.
- Market analysis/marketing plan: Using your detailed market research, this part of the plan describes the potential market for your product or service; identifies key competitors; and explains how you will market, advertise and sell your wares.
- Operations plan: Here, you'll describe the daily nuts and bolts of running your business, such as the kinds of employees you plan to hire, where you'll locate the business, how you'll buy or manufacture your products, and what equipment you plan to use.
- Management plan: This section of your plan focuses on your company's management team, highlighting past experience that positions them to help your business succeed. If you don't have a full team in place yet, explain the roles you still need to fill and what skills and experience you'll require.
- Financial plan: For a startup business, the financial plan will break down your anticipated startup costs in detail. It should also include financial projections that demonstrate when you expect to break even. Existing businesses will share current financial statements indicating sales, cash flow and profits and losses, as well as projections for the future. Both types of plans should show how the loan proceeds will be used to increase sales and profits.
You can buy business plan software that walks you through the process of writing a business plan. BPlans is one source of software, free templates and business plan advice. You can also get help writing a business plan from the SBA; their website can connect you with business advisors to guide you.
Where to Get a Business Loan
Where can you get a business loan? Here are some of the best places to look.
- Your current bank or credit union: It's always smart to start with the financial institution you already use for personal or business banking. If you have a business bank account, that bank has a record of your business's financials that can help them make decisions. Even if your bank can't lend you the full amount you need, they might be able to provide a smaller loan or a business line of credit to help.
- Business-focused banks: If you don't yet have a business bank, talk to other local entrepreneurs or search online to get recommendations for banks catering to small business owners.
- SBA guaranteed lenders: The Small Business Administration is not a lender itself; instead, it guarantees a percentage of small business loans made through approved banks and credit unions. The SBA guarantee reduces risk for the lender, which can make it easier for small business owners to get loans. The SBA's Lender Match program can match you with SBA guaranteed lenders in your area.
- Microlenders: Are you seeking a small amount of money ($50,000 or less) to start a business? Microlenders are typically nonprofit organizations that make small loans to new business owners. They often focus on underserved communities or individuals and may even provide consulting services to help improve your odds of success. Accion and Grameen America are two of the best-known national microlenders; the SBA also has its own microloan program.
- Online lenders: If you apply for a loan with an online or alternative lender, you probably won't be asked for a business plan. Most online lenders simply use your business bank statements or accounting records to assess your business's financial stability. Although these loans can be easier to get than loans from traditional sources, they often charge higher interest rates and have shorter loan terms, which can make them more challenging to repay.
How can you find the best business loan for you? Start by determining exactly how much money you need, what you need it for (some loans restrict what the money can be used for), and the loan payments you can afford. This will help you narrow the field to lenders that offer the amounts and terms you need.
Next, shop around. There are lots of business lenders out there, and the more options you investigate, the more likely you are to find a good match. When assessing lenders, compare the loan amount, loan term, annual percentage rate (APR), fees, penalties and total cost of the loan. Last but not least, make sure the monthly payment is manageable—otherwise, you may have trouble paying off the loan.
Keep in mind that you don't have to get all your financing from one place. Particularly when launching a business, it's common to get money from several sources, such as friends, family members, individual investors, loans and a business line of credit.
Having trouble finding a business loan with the terms you want? You might improve your odds by putting up some collateral, such as business equipment, receivables or inventory. (Pledging personal assets, such as your home, as collateral for a business loan can be risky; if you can't repay the loan, both your business and your personal finances could suffer.)
The Importance of Credit When Applying for Business Loans
Putting up collateral isn't the only way to lower the cost of a business loan. Having good personal and business credit scores can also help you qualify for better loan terms.
If you've been in business for a while, your business should have its own business credit score and business credit report, which lenders will review when considering your loan application. Similar to your personal credit history, your business credit history reflects how your business manages debt, and includes information such as on-time payments, collections and bankruptcies. The three major business credit bureaus—Experian, Dun & Bradstreet and Equifax—use data from your vendors, bankers, public records and other sources reported to your business credit history to generate a business credit score.
If your business doesn't have a credit history—for example, if it's a startup or relatively new—or if you're a sole proprietor, lenders will rely on your personal credit history and credit score when evaluating your loan application. Even if you have a business credit score, some lenders will want you to personally guarantee the loan, and they'll examine both your personal and your business credit before agreeing to fund you.
Before you apply for a business loan, ask the lender which credit scores they consider. Then check your personal credit report and credit score, as well as your business credit report and score, to see how you and your business measure up. Less-than-stellar credit scores won't necessarily rule out a business loan, but you may have to settle for higher interest rates, less favorable terms and less money than if your scores were higher.
If you don't need financing immediately, it's worth taking steps to boost your credit scores before you apply for a business loan. You can improve your personal credit score by bringing late accounts current, paying all bills on time, paying down credit card debt and not applying for new credit accounts in the months preceding your application.
To improve your business credit, check to make sure your business credit cards and any trade credit accounts with suppliers report to the business credit bureaus. Pay your business's bills on time and work to pay down high revolving credit balances.
Don't have a business credit history? Establish business credit by setting up a corporation or Limited Liability Company (LLC), getting a federal Employer Identification Number (EIN), opening a business bank account and opening a credit card account in your company's name. Then pay your business's bills on time and make sure that suppliers and business credit card issuers report your payments to at least one major business credit bureau.
A Business Loan at Last
Business loans can benefit your company in many ways. In addition to the financial jumpstart a loan provides, repaying a business loan can help to build your business's credit history and establish a good business credit score.
Once you get your loan, confirm that the lender will report your account and payments to the major business credit bureaus. Then be sure to make your loan payments on time. You can monitor your business credit and watch how your loan affects your credit score by signing up for Business Credit Advantage, Experian's business credit monitoring service. As you put your loan proceeds to work, refer to the business plan you created to guide your way.