3 Things Lenders Look for in a Business Plan
If you’re just starting your business, then you should know the importance of a business plan. A business plan is the foundation of a business, and without it, your business won’t have any solid roadmap to the future. Not only that, but it’s also an essential document if you’re looking for business financing.
Lenders want to see a lot of things in a business, and among them, a business plan is the most important. Depending on your business plan, the lender would decide if you’re eligible for financing or not. But what exactly is a business plan and what do lenders want to see in it?
What is a Business Plan?
A business plan is a written document that details the significant aspects of a business, including its financing, expansion, and profitability. It’s like a roadmap on the future of the business and how it will fare during that time. It also includes the marketing strategies, financial strategies, and even its operational standpoint.
A business plan is especially important for startups since it can be used to attract investors for equity. The business plan should be updated if the business has reached a milestone or has met a goal. It can even be changed according to the business situation. As mentioned before, a business plan can also be used to have lenders approve of your loan. That said, what are the things that a lender wants to see in a business plan?
Business Credit Score
A business credit score, rated by third-party bureaus, is a numerical rating based on a business’s creditworthiness. The creditworthiness of a business depends on several factors that include its financial history.
A business has multiple credit scores from each significant business bureaus that compute credit scores. However, all bureaus give ratings from 0-100 based on several factors. So why does your business’ credit score matter? Well, according to the National Small Business Association, 73% of all small businesses use financing. Another survey by the NSBA shows that more or less 20% of all small businesses are denied business financing because of their poor credit scores.
Also, it’s important to remember that your business credit score determines if your business is eligible for a loan or not. Also, it determines the loan’s borrowing limit and interest. It can even affect the time you’ll receive the funding; as with an excellent credit score, you can get loans that can be deposited in minutes.
Financial Accounting
Lenders and investors look at a business’s financial accounting to see critical information about its current health, profitability, and the risks. That said, an investor can tell if a business is performing well by checking if the business has paid its dividends and its positive margins.
On the other hand, a lender will specifically look at the business’s financial accounts to see its liquidity, leverage, cash flow, and overall solvency to see if it can pay back the loan it’s requesting.
For a business, there are three primary financial statements: balance sheet, income statements, and cash flow statement. These statements are typically issued routinely every quarter. Also, financial accounting information can be used in a variety of ways. Although the information isn’t tailored to any group, it prioritizes the lenders and investors since they provide the business’ funding.
However, it’s important to remember that financial accounting is based on standards by the generally accepted accounting principles or GAAP in the US. Corporate managers and accountants strictly abide by these standards to make it relatively easy for investors and lenders to compare the current performance of the business with its previous performances and competitors.
Collateral
Collateral is an asset or piece of property that the lender will seize when you fail to pay back a loan. It’s a form of security that the lender needs when you take out a secured loan. In general, secured loans have the lowest interest rates since the borrower’s risk will be mitigated by the collateral.
This is especially important to startups since they can offer up one of their assets as collateral for a business loan as they don’t have that much of a profit yet. But what if you don’t have something that can serve as collateral? Luckily, some loans work by giving you funding for a piece of equipment or property and have that as your collateral. If you default on the loan, that property or equipment will be seized.
To Wrap Up
These are just some of the things that a lender wants to see in your business plan. They directly affect your chances of getting a loan. Not only that, but they can also affect your borrowing limit and monthly repayment. So if you’re building up your business plan, make sure to include them.
