When is a Business Plan Required?
Published March 9, 2009 | 
Time after time entrepreneurs walk into their commercial bank, sit down with the commercial loan officer and try to explain their need for a loan to help them fund either the start up of their business venture, or expansion, or need for working capital during the current recession. The response to them by the banker in almost every case is the need for them to develop and prepare a business plan for what they are trying to accomplish, whether start up, business acquisition, business expansion, or maintain current operations.
The business plan requirement has been standard operating procedures for some U.S. government agencies including the Small Business Administration which works with the lenders by guaranteeing approved commercial loans given to borrowers by commercial banks.
I cannot imagine anyone knowingly asking for a loan without a detailed business plan to present to everyone involved with the loan approval process, providing answers to all their questions and issues with the related risks.
How can any entity from the smallest, to ones the size of the U.S. Automobile Manufacturers (General Motors, Chrysler, Ford) ask for any amount of money, especially from the people of the United States without a detailed Business Plan outlining the funding needed, defining the “use of proceeds” for the funding, and what they think the results will be, based on a set of general assumptions developed through experience and research (i.e. jobs created, jobs saved, capital formation, etc.).
The auto makers behaved like they had been told by someone to just show up, ask, and no problem, they would get the funding they want with not too many questions in the process. To their surprise they were told to come back when they had prepared a business plan explaining why they should get the loans and how changes to their business models if any, would result in positive cash flow, associated net profits and positive effects to the balance sheet. Not having a formal Business Plan is a major weakness in all but the simplest and smallest of self-funded business models.
A detailed Business Plan was also missing for the recent stimulus package and many questions about the package details were simply met with shrugs and statements like “details would be provided” after funding has been approved. No wonder consumer confidence has been shaken to extremely low levels.
Business Plans are never easy to prepare, even after one has prepared hundreds for projects of all levels of spending, but the principles remain the same, just as the principles of successful business models remain the same, resulting in profit, cash flow, increased equity, and job creation.
Remember Business Plans should be prepared to provide feasibility information for the process of determining whether funding should even be pursued at all, and successful Business Plan not only help entrepreneurs and businesses potentially realize their greatest dreams, but also avoid their worst nightmares as well.