Why banks ask potential borrowers for business plans

When searching for credit to start a small business, is a written business plan really that important? After all, verbally is the most effective way to demonstrate one’s passion for the business.

While a business plan might seem like just a summary of obvious information, since most business owners can explain the value of their business concept in their sleep, committing it to writing is really important for a variety of reasons. Spending more time on this step can pay large dividends. Perhaps the most obvious purpose is to obtain a good summary of the business model, how it is expected to function, and the various aspects of managing the enterprise. It’s important to remember the banker is probably not an expert in your business, as he or she likely deals with a plethora of customers in several industries and niches.

The business plan helps the banker understand the thoroughness of the owner’s thought process and demonstrates due diligence, how well the business cycle has been analyzed, and whether assumptions are realistic. It also provides an opportunity to demonstrate and describe plans to address areas of managing the business that may be outside the owner’s expertise, interest, or time availability.

Financial projections should be included in the business plan indicating credit needs and timing, best case, worst case, and most likely case scenarios. Knowing the impact on cash flow in each scenario is important in understanding the cash and credit needs of the business. Ironically, sometimes extreme sales success, while long-term positive, can create a severe cash flow shortfall.

While a basic business plan format can be garnered from the Internet, other third party resources should be considered. The Small Business Development Center (www.wisconsinsbdc.org) is an excellent resource, as are many accountants and other business consultants. Developing a great business plan can save much time, energy, and potentially dollars in the future. It will also help you present a positive image to lenders or other financial partners, and help you get to “yes.”

Alan Forristall is market president-Milwaukee at Midland States Bank in Wauwatosa.

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