Rejecting a business idea is upsetting, but there are occasions when it’s the wisest course of action for all parties involved. As a volunteer on a lending committee, I wish we could approve every loan request that came across our desk, but we can’t. The committee meets as required to go over applicants’ business proposals and make funding decisions. Most of the very small firms we work with are looking for small loans, often around $250,000.
One of the riskiest business sectors for a lending institution is financing plan to unproven, young business owners. Despite this, we are still able to maintain a low loss rate. I’ve seen a few issues come up again over the course of more than a dozen years. The fascinating thing about these business plan killers is that they nearly never move around by themselves; instead, they typically show up in groups. The top ten things that kill business plans are listed below, along with solutions.
Dreadful Personal Financial Plan Profile
What are the chances that someone with appalling personal financial management skills will suddenly become a successful manager of finances for a company? It is quite unlikely. Poor behavior in one’s personal life is much more likely to be simply transferred over into the workplace.
The primary distinction is that in business, poor financial management frequently causes damage to a far wider spectrum of individuals and institutions. High credit card financing, garages full of toys (trucks, Seadoos, Skidoos, bikes, boats) that are 90% financed, a bad credit history, and a lack of funds are all red flags that appear in company plans.
First, arrange your personal finances before requesting a company loan. Pay off loans, settle any dubious obligations, gather equipment for your firm, and put some money aside.
Insufficient or Non-Existent Owner Equity or Security
Having a business is always hazardous, but starting a new firm is even riskier. Lenders will want to know that you have a personal “investment” in your company. Your equity is the portion of the company you individually own. The sum of money or equipment you invest in the company is another way to think of equity.
Lenders want to know that you are committed enough to the project that you won’t be tempted to quit when things become difficult. What level of owner equity is adequate? Less than 10% invites inspection, whereas 20% or more will make your proposition more alluring. The percentage varies from lender to loan.
Any shrewd lender would expect that you be sufficiently invested so that, in the event of financial difficulties, it is you who spends the night worrying about how to pay the bills and not them. Equity’s sour sister is security. If you provide some kind of asset as security, your loan application will be stronger.
Assets with a clear resale value that exceeds the loan will be more appealing to lenders. Inventory is typically less desirable because it often multiplies and vanishes when things are difficult. Create some equity to offer to the table as part of strategy two. Get a temporary second job, sell some toys, borrow some love money, or save money.
Inadequate Market Research
Different severe manifestations of insufficient market research exist. It could appear as a weak business case in the company plan. It may manifest as having an imbalance between the amount of primary market research and secondary information (from other sources) (that which you gather yourself). A company plan that lacks market research may be overly general and not specific enough. The fact that the business owner has not spoken with or listened to the potential clients is probably one of the most prevalent and baffling symptoms. Lenders want proof that you’ve “turned over all the rocks” to learn as much as you can about their loan candidates’ businesses.
If I conclude from reading your business plan that I know more about your industry than you do, I won’t be motivated to grant you a loan. Third strategy: Make your reader and yourself believe your business case. Continue your market research until you establish yourself as “the expert” in your industry. You’ll be more self-assured and find it simpler to persuade your readers that you are an expert in your field.
Transmitting and Not Receiving
It’s up to you to strike that elusive balance between being obstinate enough to push through obstacles and sensitive enough to take in important information. Your success in business depends on your capacity to listen to your customers. Being so in love with your business concept that you close your ears to criticism will not help you get a loan. Customers, bankers, and business analysts all cast ballots with their money.
They can communicate with you without shouting at you. When they speak at a reasonable volume, it’s crucial to pay close attention. 4. Listen and take notes. Pay attention to both your supporters and detractors. Those that criticize your business plan should be listened to because they could be guiding you in the right direction. When you believe you’ve heard everything, pay closer attention!
Dishonesty, Discrepancies, Inconsistencies
Giving the impression that you are anything other than honest—whether on purpose or by accident—is a certain method to swindle yourself out of a loan. Any sort of dishonesty in your business plan or in your interactions with the staff of the targeted loan agency will guarantee the rejection of your application.
Although telling outright lies is the more egregious offense, there are plenty of other methods to convey deceit. For instance, incomplete or incorrect information raises concerns and conveys the wrong idea. The easiest approach to get a “NO” is to conveniently omit some of the less visible, unflattering financial information (such unpaid, past-due taxes). Five: Be truthful, exhaustive, and precise.
Not Answering the Key Business Questions Clearly
A tool for communicating with people is your company plan. What goods or services do you offer? Just who are your clients? How will you reach your target market with your product or service? Will you become wealthy? Can your company afford to pay back the loan? Does your plan effectively convey these concepts?
Sixth Strategy: Respond to the fundamental business queries. What, who, where, why, when, and how. There are several business planning methods that can give you a framework to keep you on track (although none are better than the Roadmap!). A sound business planning system will give you a framework to organize the variety of data you will gather. Pick a system, then implement it.
Shoddy Presentation
Even with the most thorough market research ever conducted, your target audience may not even read your business plan if you are unable to adequately articulate its findings and present it in a professional manner. Seventh tactic Make a presentation that is professional. Ask a friend or hire someone to proofread; if necessary, have the plan keypunched. Do a professional job. By demonstrating your concern, you will improve your chances of getting a loan.
Pie-In-The-Sky
Overly optimistic or inflated sales projections or cash flow forecasts will always cause your loan application to fail. Too bright of a future will confuse the lenders and scare them away from the loan. Option Eight: Even if you think you’ll be floating on a sea of money in a few months, keep your expectations in check.
No matter how high your financial goals may be, you should be aware that most firms do not start off profitable. Estimate your expenses slightly higher than you anticipate them to be and your sales modestly. Maintain a realistic cash flow and make sure to account for ALL costs.
Fish-Out-Of-Water Syndrome
When someone tries to enter a field they have no knowledge about, this is what happens. It becomes clear when the applicant’s lack of past experience in the field of expertise that is the company’s primary focus is revealed by the owner’s background information. A heavy-duty mechanic, for instance, could want to open a modest restaurant. A dangerous but not impossible leap.
Knowing your business is strategy nine. It is crucial to acquire as much background information on your industry and experience as you can. Disgruntled or displaced workers who believe they can succeed as well as or better than their company sometimes start successful firms.
Use reliable market research, the Internet, classes, books, tapes, and trade periodicals to enhance this prior knowledge. Being knowledgeable about your company will boost your confidence and expand your loan alternatives.
Too Little Too Late
This point relates to already-running enterprises looking for financial support after things have already gone south. We see the application far too frequently when the accounts receivable are out of hand or when significant suppliers have been waiting for unreasonably high amounts of money for far too long.
Collectors who are hot on their tail and past-due taxes are further components of this situation. Getting enthused about lending money to pay for bills that should have already been paid is incredibly difficult.
Tenth strategy: Take action when your company faces financial difficulties. Take the difficult decisions early and move rapidly to implement them. You are much stronger coming to the table early with a well-thought-out plan, rather than later with a request for aid to pay back taxes, if your recovery plan calls for a loan.