Writing a business plan is an incredibly important aspect of running a successful business, including a small business. Having a clear picture of where you want to go with your business, whether it’s a newly formed startup business or an existing business that’s been around for decades, is critical to executing in the long run. Strong businesses don’t operate on a whim based on the momentary ideas of its owner or owners. Sure, businesses have to adapt and adjust to different market trends, obstacles, and challenges. But that doesn’t mean they don’t have clear long-term goals in mind. Good business owners and entrepreneurs understand this – and to crystalize their plans and goals they write well-constructed and thought-out business plans.
However, the importance of having a good business plan goes beyond simply having a clear roadmap of your goals and objectives. A good business plan is also a critical component of the loan process if your business needs funding, and it can be extremely challenging to obtain a good loan with a solid interest rate and favorable repayment terms without one.
In this post, we’ll cover what exactly a business plan is, and then we’ll dive into why it is important for acquiring a loan. Then, we’ll discuss how to write the best business plan possible so that you can dramatically increase your chances of getting a quality loan for your business in the future. After all, knowing how to write a business plan is a skill every small business owner should have!
What Exactly is a Business Plan?
A business plan serves as the foundation of your business – a starting point from which you can operate. It gives you clear goals and objectives that you can work toward in the long run, providing you with an image of what success looks like for your business early on. It is a structured way of thinking through your business and what its key components are.
Strong business plans detail each stage of starting and managing your own business – it should cover how you want to structure your business, how you want to run it, how you want to grow it, and where you see it in five, ten, or even more years.
Why Are Business Plans Important?
Business plans are often critical for convincing lenders to give you a loan. Lenders are taking on risks whenever they give a business a loan, and they want to be confident that you will be able to repay the money they loan you in the future. As such, they want to really understand your business, what you do, and how you plan to use the money. A business plan is the best and easiest way to communicate this to them in a concise and consistent format. This allows them to make an informed decision as to whether or not they are comfortable giving you a large sum of money.
Small business loans are actually quite risky, with small business owners being one of the riskier borrowers out there due to the nature of startup businesses. This makes having a business plan is even more important.
Remember, having a business plan does not negate the other components that are necessary for obtaining a loan. Lenders will still look are your credit score, your credit history, and your financial statements in any loan application process. A business plan is just another component they’ll want to look at on top of all these other things.
How is a Business Plan Structured?
Every business plan is structured a little differently depending on the business, however, there is a general format that you can follow to structure it in a clear and concise way.
A traditional business plan follows a very structured approach, splitting up your ideas and plans into clear, identifiable sections.
A traditional business plan format is as follows:
- Executive Summary
- Company Description
- Market Analysis
- Organization and Management
- Service or Product Line
- Marketing and Sales Plan
- Funding Request (if you are seeking funding)
- Financial Projections
The SBA has two example business plans that can be useful to view as you seek to understand what exactly goes into a business plan.
We’ll dive into each of these different components of a business plan in the next section.
Have you ever viewed a summary of a book or the plot of a movie? This is essentially what an executive summary is. It should seek to convey all the key points of the business plan in just one page. You should talk about your company, its goals, its product, and why your product is primed for success given your experience and the market conditions. However, it should only be about a page long, so make sure you only mention crucial information. For example, there is no need to dive into detailed financial information and projections in an executive summary. Oftentimes, less is more with an executive summary.
A good way to think about an executive summary is to think about how you would pitch your business idea to another person if you had just two or three minutes. An executive summary is exactly this.
The company description is where you can start to make things a little more detailed. In the company description, you can begin talking about your mission statement, who your company’s principal members are (i.e. the leadership team), and who your strategic partners are. You can also detail what your leadership structure will look like and what the flow or chain of command is.
The market analysis is your chance to prove that your business is filling a need or taking advantage of a real opportunity. Obviously, lenders want to know that the market actually has a need for your product and your business – otherwise, it will be like throwing money to the wind. You can spend millions of dollars developing an amazing product, but if there is no market need for the product it won’t matter.
A market analysis should start with the big picture and then narrow in on details. For example, you should start your market analysis with an industry overview. Cover what the industry outlook is and what the expectations for the future are (i.e. is the industry supposed to grow at a certain percentage in the coming months or years?).
You should then discuss where the opportunity in the market is for your business. Narrow in on your target market and why there is an opportunity there. Is there a niche that is not being filled? Have you discovered some sort of market need for a product that is not being offered but which you can provide? If you have done any in-house market research or had any external market research conducted, now is the time to mention it and discuss its implications.
You can also discuss the market share that competitors currently have and what their strengths are weaknesses are. Include a competitive analysis of the businesses currently in the market and identify where in the picture your company fits in. Any information you can provide that can illuminate where within the market your opportunity is and how you can capitalize on it is important and can make a difference.
As a quick reminder, be sure to cite your sources when referring to data and market research. You don’t want it to look like you just made the numbers up. Using reputable sources will increase the credibility of your analysis. And it goes without saying that you should not make any data up.
Organization and Management
The organization and management section is your opportunity to design the flow chart of your company’s chain of command. This is the first step in starting to form your operational plan – you’ll need to decide who makes decisions about what things and at what levels. For example, you might be running an insurance brokerage, in which case you’ll need client service teams. Each of these client service teams will need a leader, those leaders will have employees they are in charge of, and someone will be in charge of all the client service team leaders. You can also use this section to start outlining expected salaries for employees.
With regards to each of the management positions, you will also want to elaborate on what their responsibilities will be. If you have more than one owner, you’ll want to pinpoint what their individual roles are, their qualifications, and any other relevant information that will prove to readers that they are up to the task of handling their responsibilities. Think about what would be on each individual’s resume, for example, and how these various points would enable them to perform their job competently. Especially when applying for a loan, you want to give the lender confidence that the leadership team is actually equipped and suited to execute the business plan. After all, you can have the best product idea in the world, but if your leadership is not prepared to execute, the product will struggle to even get off the ground.
Obviously, the larger your organization currently is the more in-depth and expansive this section will have to be – you might even want to include an organizational chart. However, if you are a new business that is starting small with just a few employees then odds are you will have a small management team – in fact, you may be the only manager! If this is the case, it is ok for this section to be relatively small. Just make sure you talk about your personal qualifications and why you are well-suited to take on the task of executing the plan you have outlined.
Service or Product Line
The service or product line section is where the rubber really meets the road since this is the area where you will actually describe in detail the product you plan to offer to the market. This is a section that really needs to shine because you want to prove that your product is well-suited to make a splash in the market. You’ll want to go in-depth on what you are going to sell and who you are going to sell it to and why they would want it.
Depending on the stage of development of your product, you will want to include things like the cost per product, the selling price of the product, and any data that proves it is desired by the market. If your product is still being developed, discuss the stage it is in and the timeline to market. For example, have you filed for any patents on the product? Are you currently in the process of getting a patent or have you already received the patent? Is there any intellectual property involved that even needs to be protected?
In terms of describing the product itself, you will want to include details like what the product’s lifecycle is. Will customers come back frequently to buy another? Or is it a long-term purchase where customers will only purchase one every few years? Are you planning to roll out any new products or updates in the near future to drive demand and bring customers back?
This is the section where you are pitching the actual product, so make it count! You only get one first impression, so make it a good one!
Marketing and Sales Plan
This section is where you get to start outlining some of your operational plans and goals. Developing a marketing and sales plan is not only something that will be used by lenders for assessing your business but it is also something you can use on a daily basis as you try to grow your business.
The marketing and sales plan is where you want to start thinking about consumer adoption and how you can get people to start using your product. Are you going to run ads? Will there be free trials or free samples? What sales channels are you going to use? Are you going to be selling from a brick-and-mortar store, online, or both? Will you be selling online from your own website or will you be selling online through a third-party platform like Amazon?
You will also want to dive into what your growth strategy is. Does your plan include multiple steps? Maybe you are going to start out small by selling locally, being building revenue and a loyal customer base, and then start expanding outwards after that.
Outside of sales channels, you will want to think about marketing channels as well. Will you maintain an active social media presence? If so, which social media accounts or sites will you use? This, for example, could depend on the demographic you are trying to reach. If you are trying to reach older consumers, like baby boomers, then you will probably want to rely heavily on Facebook. If you are trying to reach Millennials and Gen-Z, a very young group of people, then you would probably want to rely heavily on building a solid Instagram presence. Remember to weave in your market and product research here, since you will want to match your sales and marketing plan with the market and demographic you are trying to reach with your product. Don’t worry if some of your sections blend together a little. You want this to be a cohesive plan and the different sections should build on each other to show that you have really thought about your product critically.
If you have quantifiable results from previous sales and marketing efforts, you will want to include them here as well. For example, maybe you have seen incredible results selling on your website that you operate through Shopify. You will want to mention these. If you have been advertising on Instagram for a while and you want to use some of the money you are borrowing to bolster these efforts then you will want to include tangible evidence of your previous success.
A good marketing strategy is one of the most important aspects of a successful business. People can’t buy your product if they don’t know it exists to begin with. The result is that many great businesses with great products go out of business simply because the market was now aware of their product. Don’t let that be your business! Take this section seriously and put in the time and research to develop a sophisticated and thought-out marketing plan. This will make a difference when you try to obtain a loan.
Whenever you are submitting a business plan to a lender you have to include a funding request. This part is incredibly important and should be as clear and detailed as possible.
The funding request is where you will go into depth on the exact amount of funding you need and what you plan to use it for. You’ll need to discuss the length of time the funding will cover and exactly what it will go toward during this time.
For example, if you need to buy equipment for your business, such as a tractor for a farm operation, then you need to specify this. However, it is often not enough to specify what you are going to use the money for. It is also a good idea to talk about why you need to purchase whatever it is you are seeking funding for. Talk about why it will benefit your business and the results you expect to achieve with it.
The importance of the financial projections section cannot be understated. Lenders are particularly interested in a business’ finance when deciding whether or not to approve a loan since this is the most important factor in determining whether or not a business is capable of eventually repaying the loan. Lenders will want a clear picture of your assets, liabilities, and historical business performance before issuing a bank loan.
This section will largely depend on the length of time you have been in business (remember, getting a loan for a brand new business is far more difficult than getting a loan for a business that has been open for a few years and has proven its viability). If you have been operating for a few years, then this is where you can provide your balance sheet, income statement (or profit and loss statement), and cash flow statement. Generally, these should cover at least three to five years of operation. You will also want to provide quarterly financial projections for the next year. This financial plan will help clarify your expectations for the future and your ability to pay back the loan.
Financial projections and financial records can be difficult to compile, especially if you haven’t been keeping tidy books since you began operation. This is why if you are considering starting a business keeping track of your finances in an organized and standard format is incredibly important. It is so much harder to go back and construct your financial records after the fact than it is to record them properly from the beginning. If you need assistance with these tasks, consider investing in a financial records system, like QuickBooks, or seeking out professional financial services. You can also reach out to a certified public account (CPA) for specializes in working with small businesses for additional assistance. While this will cost money upfront, they’ll be familiar with the loan application process and the documentation you need. Their help could mean the difference between approval and rejection.
The appendix is where you can include any supporting documentation that you referenced in the other sections of your business plan and any other miscellaneous information. Items that are often found in the appendix of a business plan include resumes of key employees (such as the owner or owners), credit histories, product pictures, references, permits, patents, tax returns, and contracts. Basically, anything that you think will strengthen your business plan and your credibility can be put in the appendix. But, that said, you don’t want your appendix to be longer than the rest business plan. Try to be as concise as possible when writing your business plan (that goes for the entire document). Only include the information that you believe is absolutely necessary for getting your point across.
Resources for Writing a Good Business Plan
The United States Small Business Administration has a number of free resources small businesses can use to help them write a good business plan.
One resource small businesses can utilize are the SBA Small Business Development Centers. These centers are located across the nation, including one in every state, and they have a network of more than 900 service locations.
Each of these centers is trained to deliver counseling, training, and technical assistance to small business owners operating almost any type of business. One of the areas they help small businesses in is designing and writing quality business plans. However, this is just one of the many areas they assist small business owners in, so be sure to check out the resources available at your local SBDC if you need assistance of any kind for your small business.
What is the Key to Writing a Successful Business Plan?
Honestly, the key to writing a successful business plan is as simple as reading other business plans. Try to find examples of real business plans on the internet (you can also take a look at the aforementioned business plan examples provided by the SBA). Reading other business plans will not only give you an idea of what goes into each component of the plan but it will also give you ideas. If you have never written a business plan before, there is essentially no way to just sit down and write one. It is absolutely imperative that you look at other plans first to really get a feel for what a good business plan talks about.
If you know other small business owners, ask them to review your plan if they have the time. It is always a good idea to get feedback. Constructive criticism will help you refine your plan so that when you finally submit it as part of a loan application you have already worked out all the issues and kinks. Plus, other experienced business owners will be able to give you tips on what to include in your business plan to increase your chances of getting a loan.
Writing a business plan may seem like a lot of work, but it will save you a lot of time and effort in the long run. Having a clear image of where you want to go with your business is critical if you are going to make unified and coordinated decisions that will lead your business in the proper direction.
Beyond this, business plans are a critical component for obtaining financing and loans. Without one, banks and other lenders won’t be able to gain a clear picture of your business and whether or not they are comfortable lending you money. And it’s never too late to write a business plan! Even if your business is already a number of years old, there’s no time like the present to write one. It can make a world of difference!
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