A business plan is considered a useful tool and a needed part of applying for an SBA loan or other traditional term loan from a bank or credit union. It demonstrates to any potential lender that you understand your market, know your customer, can generate the income to make timely payments, and have a contingency plan should something unexpected happen.
However, because so many business owners are now finding financing outside traditional banking channels, does it really make sense to go through the exercise of drafting a business plan if your lender isn’t requiring one? It might even be fair to ask, “If it doesn’t help me get a loan why should I spend the time to do it?”
Although there are lenders, including online lenders, who don’t require a business plan as part of the loan application process today, it might be a mistake to dismiss the value of a business plan altogether. “[B]usiness plans aren’t just for startups seeking a loan—that’s really a myth about small business planning,” says Sabrina Parsons, CEO of Palo Alto Software who creates software to help business owners create business plans. “Small businesses, the Main Street businesses we work with, need to ignore that myth if they want to build healthy and successful businesses.”
Of all the businesses that start today, statistically only about half of them will be around five years from now. All things being equal, that’s basically about the same as flipping a coin—which is one reason why traditional lending has looked to a thoughtful business plan as one of the ways they evaluate the business acumen of a potential borrower. The better he or she is able to articulate what they want to do with borrowed capital, how they intend to do it, and the positive impact it will have on their business, the more likely they’ll still be around to make all the periodic payments.
"Did you know that 60% of businesses that fail do so because of cash issues? Many small business owners don’t understand the importance of regular planning and forecasting: and it’s hurting their businesses because they haven’t planned for potential challenges and don’t have any kind of strategy for dealing with them," said Parsons.
Those who take the time to create a business plan may be improving the odds of business success.
Professor Andrew Burke, in joint research with Stuart Fraser and Francis Green of Warwick Business School, discovered that although there are a number of very successful businesses that don’t invest their time and resources into business planning, there are some pretty compelling reasons to do so. He suggests, “…business plans do indeed add a lot of value to the businesses that choose to write them, including high quality ventures, and these effects are quite dramatic. Growth in the venture is increased by a factor of around 30% as a result of writing a business plan. This benefit cannot be ignored. But particularly it is the quality of the business planning process which counts…”
Burke asks four questions that need to be addressed in a quality business plan:
- What is the uniqueness of the business proposition? Because so many businesses seem to fail, Burke argues, “… a surviving or high performing business must be unique. So one of the key things therefore is that a business plan must identify what feature is going to distinguish it from most businesses which we know will fail.” As a business owner, knowing what makes your product or service unique will help you focus your efforts on that which sets your business apart from the rest of the competition. While that might sound obvious, thoughtfully going through the business planning exercise might reveal other relevant differences that will allow your business to compete at an even higher level.
- Is it a purely desk based plan? I couldn’t agree more when Burke suggests, “A major turn-off in assessing the strength of a business plan is where it becomes apparent that the business plan has been written by somebody who has remained behind a computer for the entire exercise. The business plan must be based on a real feel for the business, not just a set of figures produced from the desk top.” The value to anyone evaluating the plan is not only diminished, but the value to the business owner is minimal if the business plan doesn’t reflect a real world view of the business from the perspective of someone who has rolled up his or her sleeves and really understands what the business is supposed to do and what it’s doing now.
- How realistic are the assumptions underlying the financial projections? “People often mistakenly think those who make judgments about business plans will be impressed by lots of analysis and financial acrobatics,” says Burke. In reality, it’s a lot less about the formula you use to make financial projections and more about the underlying assumptions that inform the formulas. “For example,” says Burke, “are the projected volumes of sales realistic? Are there other businesses like this one that have delivered similar sales? Are the costs accurate? The key lesson we have drawn from our research is that much depends on what you are writing the business plan for and insight into the context of your business.”
- Is the business static or dynamic? “There is a misleading false debate around two distinct approaches; a very rigid sort of plan, where people can predict the future with great accuracy versus a no plan approach which involves getting out to the market and starting to trade, assessing the information gained and adapting the business as a result,” says Burke. I’ve met very few business owners in my 30+ years in small business that can accurately predict what’s going to happen five years down the road. I’m not convinced that’s the real value of the plan. However, creating a plan and measuring performance against the plan—with a willingness to adjust the plan when necessary—seems to be an approach that works well. So basically, Burke and I agree, leveraging both approaches often yields good results.
There’s no question, building a sound, thoughtful, and useful business plan is not necessarily easy, but it could be worth it. When you consider that roughly half of all the businesses that start today won’t make it to their fifth birthday, business practices that can improve the odds of a successful business just make sense to me. Creating a detailed, accurate, and realistic business plan is a good investment in your business. I think this is true regardless of whether your business is a startup looking for a loan or a more established business.
