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What bankers look for in business plans

By Charles Hopkins Published 04/7/2006 | Business and Finance

If you want to get a loan you should know what bankers look for in business plans. This will help you tailor your business plan to their liking, and make a good impression. It may even soften up some bankers, who are not known to be soft towards start ups seeking capital.

Most start-ups lack collateral -- that is the assets that can be pledged to the bank to get a loan. Due to this, most loans tend to be granted to existing businesses. However, this does not mean that you have no hope.

Bank officials deal with business plans in different ways. Some give your business plan a cursory glance, before filing it away. They will go by the rule book, and process your loan application on the basis of the financial figures mentioned in your loan application.

The chances of getting a loan from such officials who are very conservative in approach is not very bright. These officials are not looking at your business idea but at protecting their banks money against possible loss.

However, there are others who will read your business plan and discuss its potential with you. These are the officials who can help you, if your plan convinces them of the viability of your business idea. The first thing they will look at is the balance sheet. The balance sheet of a start-up business needs to show the starting capital, start-up expenses, assets that have been purchased, or are required and the existing liabilities.

The profit and loss account and the cash flow statement is the next part that will be placed under the scanner. These need to be in harmony with each other and with the balance sheet.

Existing companies need to demonstrate a steady cash flow, which shows up in historical balances. Loan officers will want to see realistic cash flow figures for at lest 12 months. Profits are not always enough to guarantee cash flow. That is why bankers look for business cash flows like the inventory and the accounts receivable.

Bankers will also examine the resumes of the management team, to make sure that the founders and the managers have the desired qualifications and experience. They may also look for evidence of success in the business plan. Lenders want to protect their assets and do not want to become a part of a business failure.

Another option is to present the business plan to SBA. The SBA works mainly through commercial banks, and guarantees a portion of the loan that the bank lends to you. You will almost always be required to provide at least 30 percent of the value of the loan as collateral. The other 70 percent is guaranteed through the SBA. Usually a bank requires 100 percent collateral.

This is a big advantage for small business owners, who usually cannot provide the collateral required by a bank. The SBA requires that a business plan be submitted with the loan application. Apart from this, all the requirements of the commercial bank have to be fulfilled.