A continuation of our ‘Start your Own Business‘ series, In an extract from his book in Sunday Business Post 25/4/2010, Starting a Business in Ireland, Brian O’Kane continues on with advice on how Lenders and how they assess the worth of your Business Plan.
How a financier reads a business plan
How financiers read a business plan depends on what kind of financier they are. There are two types of financier: the lender and the investor. The lender is typically your bank manager.
Lenders will invest money in your business if they think it worth doing so by their criteria, in return for interest on the capital. The professional investor, on the other hand, will invest equity in your business and share in your risk as owner of the business.
Professional investors will postpone their return for a period -typically three to five years – but will look for an above-average return for the risk involved in doing so.
Your Bank as Lender
The average bank manager will be looking to see how you have handled or propose to handle the risks, particularly the financial risks, which your business may encounter. Bank managers are concerned about the security of the bank’s money – or, more properly, the depositors’ money – which you are seeking and for which they are responsible.
That is not to say that a bank manager will not back you. Most bank managers have discretion in the amounts they lend and will sometimes back their own hunches or gut feelings against the apparent odds.
But don’t bet on this. Turn the odds in your favour by writing your business plan and framing your request for finance in the best possible light.
Arnold S Goldstein, the American author of Starting on a Shoestring (John Wiley &Sons), suggests the following likely line of questioning from a bank manager:
- Why do you need the amount requested?
- What will you do with it?
- How do you know it’s enough?
- How much less can you live with?
- Who else will you borrow from?
- How do you propose to repay it?
- Wow can you prove that you can?
What Collateral Can You Offer?
Unless you can answer these questions to your bank manager’s satisfaction (especially the last two), it is unlikely that you will get the money you are looking for.
And don’t wait for the interview with the manager for an opportunity to give the answers to these questions. That is far too late.
The bank manager’s mind will already be made up, more or less, before your meeting. Your plan will have been read thoroughly.
The interview is intended to confirm the manager’s decision. If you have not answered the relevant questions in the plan, you are not likely to have much chance to do so later.
You don’t need to write your business plan in a style that asks the questions in the form above and then gives the answers. What you need to do is to ensure that the information that answers the questions is:
- Contained within the plan
- Visible within the plan
- Capable of being extracted by a reader from the plan.
In another words, a bank manager will look for three things: character, collateral and cashflow.
Character means you. A bank manager who has any reason to distrust or disbelieve you – from previous dealings or because of your reputation or because of errors or inconsistencies in your business plan – will not invest money with you.
Collateral means the backing you can give as security for the loan. In some cases, collateral is not needed. But to the banker, who is responsible to the bank’s depositors for their money, security is everything. If you can offer collateral, it will certainly help your case.
Cash-flow means your ability to repay the loan on time, out of the proceeds of the investment.
The bank manager will prefer to see the loan repaid at regular monthly or quarterly intervals with interest paid on the due dates – anything else upsets the system.
Unless you can show that the business will generate enough cash to make the payments the bank manager requires – or you have explained clearly in your business plan why this will not be possible for an initial period – you will not get the money that you ask for.
Professional investors, such as venture capitalists, have a different viewpoint. They accept risk, though, like any prudent investor, they will avoid undue risk and seek to limit their exposure to unavoidable risk.
David Silver, another American venture capitalist and author on enterprise, suggests that their questions will be along the lines of:
- How much can I make?
- How much can I lose?
- How do I get my money out?
- Who says this is any good?
- Who else is in it?
Writing the business plan
There are three stages in writing a business plan:
Each is important but the most important is the first one: thinking. Be prepared to spend at least 75 per cent of the time you have allocated to preparing your business plan in thinking. Time spent in this way will not be wasted. Use this time to talk through your business with anyone who will listen, read widely – especially about others in your area of business – and avoid finding reasons why things cannot be done.
Writing can be done fastest of all. Use a computer to give yourself the flexibility you will need to edit the document later. If you find it difficult to start writing on a blank page or computer screen, talk instead. Buy or borrow a hand-held dictating machine.
Talk to yourself about your business. Explain it to someone who knows nothing about it. Get the tape transcribed, and your business plan will be on the way.
Editing is the last task. Editing is an art. Some people are better at it than others, but everyone can learn the basics. Essentially, it’s about clear communication.
Read through your draft business plan – aloud, if you find that helps. Does what you have written say what you want? Start deleting.
You will find that quite a lot can come out without doing damage. When you are happy with your draft, put it aside for a day or two. Come back to it fresh and see whether it still makes sense. Edit again where it does not.
And when it is right, leave it alone.