It is difficult for companies to receive the capital needed to grow their businesses. Many struggle with the process involved in acquiring a loan. In a recent survey, I discovered the three biggest mistakes entrepreneurs make when presenting their plan (and commercial loan application) to lenders.
Mistake #1: Companies don’t understand the bank’s risk concerns or how to position their companies for approval. There are three parts to a successful bank application: good credit, collateral, and cash flow. Good credit is determined by your FICO score. Banks will request collateral for business debts, and sometimes the collateral we have is not plentiful or attractive to mainstream banks. And cash flow is shown through a strong business plan. Many entrepreneurs forget that banks are businesses, too. They are in the business of making loans that will be repaid each month. A bank’s greatest concern is that the entrepreneur will default on his loan. The business leader’s job – when presenting a business funding package – is to show how you’ll alleviate the bank’s risks within your funding package.
Mistake #2: Entrepreneurs don’t know how to clearly articulate their vision, their client attraction plan, and how their team will take advantage of the market opportunity. If you’re unable to attract paying customers to your service, you will never survive. If your employees are unable to serve your customers and turn them into loyal, raving fans, you will earn a bad reputation on social media and throughout social circles. Within your business plan, you MUST show how you will not only attract but retain patrons
Mistake #3: Business owners don’t know their numbers. After reviewing your Executive Summary, the commercial lender will review your financial forecast and past financial performance. Then they’ll ask questions. Being able to clearly articulate your calculations and back up your forecast improves your chances of getting approved.
Some bankers will say that the business plan is unimportant in the commercial loan process. Untrue! I know a company that was turned down nine times from commercial lenders. He changed his business plan and received four approvals. Why? Because his business plan showed he avoided the three mistakes shown above.
Your first instinct may be to copy a business plan template from the internet and simply fill in the blanks. This method may be easier in the short run; however, it won’t give the desired result.
Remember, bankers see thousands of loan applications annually. Whether you’re seeking a business loan for working capital or business expansion, you must show a clear understanding of your numbers, your client attraction plan, and your repayment abilities.