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- Outdated historical financial information or industry comparisons will leave doubts about the entrepreneur’s planning abilities.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.
