'If you fail to plan, you plan to fail’
When you are a bank considering an application for lending this statement rings true. A prospective client without a business plan isn’t very attractive as it is difficult to quantify how you intend on achieving your goals and ultimately repaying the bank.
The bank considers ‘three P’s’ when lending money to a business:
- Protection – What security is available? Is it a mortgage over your home or investment properties? Alternatively, are we able to lend directly against the balance sheet of your business?
- Payment – How is the lending going to be repaid and over what term? How reliable is the cash flow expected to be?
- Finally, the most important P is People – Who is behind the funding request? What is their background / experience? What have they achieved in the past and how is this relevant to the business opportunity they are looking at now?
A business plan is your best chance at conveying why the bank should lend you the money and support your business. It demonstrates to the bank that you have commercial acumen and essentially sells your ideas to us.
The business plan should integrate with the budgets/forecasts that your accountant will prepare. A key area that your business plans should cover are the assumptions on which your forecasts are based. For example, if you intend to improve your gross margin by 3% this coming financial year, what actions are you specifically taking as a business owner to ensure you deliver on this.
Whilst the financial metrics are important for a banker, they are not the only area of a business plan that we will look at. We need to ensure we are well versed in your business so it’s important we understand your value proposition, the market need and your solution to this, competition, risks both internally and externally, sales channels and marketing and the wider management team. A good business advisor is able to assist you in understanding all of these elements. (In fact, our Business Partners got together to compare notes on what they feel is the most valuable advice their client's request from them, and so we turned the conversation into an eBook. Check it out, here)
The business plan forms an integral part of our credit assessment process. It shows that a client has already identified key risk areas of their business (generally through a SWOT analysis) and how these can be managed should they arise. If there are any gaps identified in the plan, this is where a Business Partner like myself will probe further. This will ensure all bases are covered and an application is generally more easily approved.
We believe your banker should form an integral part of your advisory team and should be engaged early for any opportunities that require funding or other bank products like a new merchant facility. By involving your bank early in your planning process, you will quickly identify whether we have appetite to assist your new venture and we can provide you with guidance on any key risks that we identify.
It is vital that any business plan is reviewed by a member of your advisory team. This would preferably be your accountant (not just tax accountant but one with business planning experience) as they will be preparing your budgets / forecasts that the bank will be relying on. This is where we believe firms like RightWay can support you as business owners in the preparation of a business plan and forecasts. The bank generally takes more comfort by having an external party like RightWay as part of your advisory team as they also take responsibility for the accuracy of the information.
Credibility can very easily be lost if forecasts are found to be inaccurate. Any plan presented to the bank should be realistically achievable. This is important because the bank will generally monitor your performance against the budget and it's always better to celebrate with a customer who has exceeded their budget rather than needing to discuss why the plan wasn’t achieved.
BNZ thrive on supporting growing businesses be good with money, so if we have a good understanding from the outset, we will back you as a business owner. To find out more contact BNZ today.