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Banks can see right through a weak plan, says Charles Sobel, a
counselor with a background in the market research and consulting business. "Even a wealthy uncle is not going to provide you with [capital] without some understanding of what your idea is and how you will make money," he says.
Last week, Harry Dannenberg, chairman of Score NYC's seminar committee, told us why a business plan is important when choosing the right
for your business, but it's equally important when obtaining financing.
If you thought squeezing $20 out of your father was hard, try getting a loan without a well-thought-out business plan.
Make It Look Good on Paper
A fair amount of Sobel's clients know they need a business plan, but don't know exactly how to make it effective. So before you go to your local
(OKSB - Get Report)
branch, the first thing you need to do is put your plan on paper.
You're doing yourself a favor, says Sobel, by creating a business plan that makes sense and forces you to hammer out the aspects of your business you are less comfortable with.
Simply writing it down is not enough, says Sobel. Just like a journalist or a speech writer, you must address your audience. "The potential source of funds is a business-oriented person," says Sobel. Stay away from fancy verbiage or PR buzzwords and focus on getting down a concise statement of what your business will be doing.
One of Sobel's clients who wanted to buy a franchise used the marketing language straight from the franchiser's brochure. It was so easy to spot, says Sobel, that he immediately asked the client to redo it in plain, direct English.
Show Me the Money Potential
Lenders are exceedingly careful about how they lend money, says Sobel. They look for plans that have merit and explain how the money will be paid back as soon as possible. An affluent builder friend of Sobel's advises loan applicants, "Don't tell me your ideas; show me how you're going to make money."
If a loan officer is uncomfortable with the plan but still feels the idea has potential, he or she will often go back to the
Small Business Administration
(SBA) and ask them for a loan guarantee. This means that the SBA guarantees 75% to 85% of the bank's share of the investment, says Sobel. "Both the bank and the SBA want the entrepreneur to be on the hook and committed to the business."
In addition, banks will usually insist on the entrepreneur putting up about 25% to 35% of the initial investment him or herself.
In addition to the business plan, expect the bank to ask for a plethora of additional paperwork, says Sobel. Lenders want to ensure your credit rating is good and will conduct due diligence on you as an individual.
Keep Your Ideas to Yourself
The venture-capitalist world is different from the bank-loan realm, Sobel warns. "They are looking for ownership, if not control, of an idea."
But with a solid business plan, the entrepreneur has an increased role and can keep more control of the business, rather than eventually accepting royalty checks from a venture capitalist that ends up owning the idea.
To avoid rejection by banks or having your idea swiped, a strong business plan and some capital is always the best way to go.
For more information, call 212-264-4507 and ask for Charles Sobel or any of Score's other business-plan specialists.