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Mistakes to Avoid in Drafting Business Plan
Here are errors in business plan preparation
that almost certainly will result in denial of a
loan application by a bank:
- Submitting a "rough copy", perhaps with coffee stains and crossed-out
words in the text. This tells the banker that the owner doesn't take his
idea seriously.
- Outdated historical financial information or industry comparisons will
leave doubts about the entrepreneur's planning abilities.
- Unsubstantiated assumptions can hurt a business plan; the business
owner must be prepared to explain the "why" of every point in the plan.
- Too much "blue sky" - a failure to consider prospective pitfalls -
will lead the banker to conclude that the idea is not realistic.
- A lack of understanding of the financial information is a drawback.
Even if an outside source is used to prepare the projections, the owner
must fully comprehend the information.
- Absence of any consideration of outside influences is a gap in a
business plan. The owner needs to discuss the potential impact of
competitive factors as well as the economic environment prevalent at the
time of the request.
- No indication that the owner has anything at stake in the venture is a
particular problem. The lender may expect the entrepreneur to have up to
30 percent equity capital invested in the business.
- Unwillingness to personally guarantee any loans raises a question: If
the business owner isn't willing to stand behind his or her company, then
why should the bank?
- Introducing the plan with a demand for unrealistic loan terms is a
mistake. The lender wants to find out about the viability of the business
before discussing loan terms.
- Too much focus on collateral is a problem in a business plan. Even for
a cash-secured loan, the banker is looking toward projected profits for
repayment of the loan. The emphasis should be on cash flow.
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