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by: Dan Boudreau
As a lender, I wish we could approve every loan application that hit our table; unfortunately it's
not possible. We deal with mostly very small businesses seeking small loans, usually less than
$250,000. Lending to inexperienced, new business owners is one of the riskiest arenas for a lending
agency. Still, we manage to keep our losses to a minimum. The amazing thing about these business
plan killers is that they rarely travel alone; they almost always appear in clusters. Here are the
top ten business plan killers and what you can do to avoid or fix them:
1. Dreadful Personal Financial Profile
What is the likelihood that one who demonstrates abysmal financial management in his or her
personal affairs will miraculously become an effective manager of finances for a business? It's
highly unlikely. It's a lot more likely that poor practices in one's personal situation are simply
carried into the business. The main difference is that in business a much broader range of people
and organizations usually get burned as a result of mismanaged business finances. Red flags pop up
in business plans in the form of high credit card financing, garages full of toys (trucks, Seadoos,
Skidoos, bikes, boats) 90% financed, poor credit history and no savings.
Strategy One: Tidy up your personal finances before applying for a business loan.
Pay down loans, clean up any bad debts, collect some business-related equipment and save some
money.
2. Insufficient or Non-Existent Owner Equity or Security
Business is always risky, but new business is infinitely more so. Lenders will want to see you
personally "invested" in your business. The part of the business you personally own is called your
equity. Another way to describe equity is the amount of cash or equipment you put into the
business. A lender wants to see that you are invested to the point that you will not be inclined to
walk away when the going gets tough. How much owner equity is enough? The amount varies from lender
to lender, but less than 10% is inviting scrutiny while 20% or more will make your proposition more
enticing. Any savvy lender will insist on seeing you invested to the degree that any financial
complications result in you, not them, laying awake nights stressing over how to pay the bills.
Security is the surly sister of equity. Your loan application will be stronger if you bring some
sort of asset to the table as security. Lenders will be more attracted to assets with a clear
resale value of more than the loan. Inventory is usually less desirable because it tends to grow
legs and disappear when the going gets tough.
Strategy Two: Create some equity to bring to the table. Save money, sell some
toys, borrow some love money, or get a second job for a while.
3. Inadequate Market Research
Inadequate market research manifests itself in various cruel ways. It can surface in the business
plan as an unconvincing business case. It can reveal itself in the form of too much secondary
information (from other sources) and not enough primary market research (that which you gather
yourself). Lack of market research can lead to a business plan that is too general - not specific
enough. Perhaps one of the most common and perplexing indicators is that the entrepreneur has not
talked to or listened to the potential customers. A lender will want to see that you have "turned
over all the rocks" in search of knowledge about your business. After reading your business plan,
if I feel that I know more about your business than you do, I will not be inspired to approve your
loan.
Strategy Three: Prove your business case to yourself and to your reader. Persist
in your market research efforts until you become "the expert" for your business. You will feel more
confident and have an easier time convincing your readers that you know what you are doing.
4. Transmitting and Not Receiving
It's your responsibility to find that elusive balance between being bullheaded enough to bulldoze
your way to success, yet sensitive enough to receive critical information. Your ability to listen
to your clients is the key to your success in business. Falling in love with your business idea at
the high cost of closing your ears to input will not help you acquire a loan. Business analysts,
bankers and customers vote with their money. They have no need to yell at you to get their points
across. It's important to listen attentively when they speak at normal volumes.
Strategy Four: Listen and learn. Listen to those who agree with you AND to those
who do not. Listen to all who shoot holes in your business idea, they might just be pointing you
toward success. When you think you've heard it all, listen harder!
5. Dishonesty, Discrepancies, Inconsistencies
One sure way to cheat yourself out of a loan is to give the appearance, intentionally or
accidentally, that you are anything less than above board. Any form of dishonesty in your business
plan, or during your dealings with the targeted lending agency staff, is a sure way to have your
application rejected. Blatant untruths are the more obvious offence, but it is entirely possible to
communication underhandedness in other ways. For example, missing or inaccurate information invites
questions and sends the wrong message. Conveniently leaving out some of the less obvious,
non-flattering financial information (like unpaid long overdue taxes) is a sure way to a "NO".
Strategy Five: Be honest, thorough, and accurate.
6. Not Answering the Key Business Questions Clearly
Your business plan is a tool for communicating with others. What is your product or service? Who
are your customers? How will you market and distribute your product or service to your customers?
Will you make money? Will your business be able to repay the loan? Does your plan communicate these
things clearly?
Strategy Six: Answer the basic business questions. Who, what, where, why, when,
how. There are many business planning systems (although none surpass the Roadmap!) that will
provide a framework to keep you on track. A proper business planning system will provide you with a
framework in which to place the assortment of information you will gather. Choose a system and use
it.
7. Shoddy Presentation
You can do the best market research on the planet, but if you can't communicate it clearly and
package your business plan professionally, your target audience might not even read it.
Strategy Seven: Provide a professional presentation. Ask a friend or pay someone
to proof, get someone to keypunch the plan if you need to, but do a professional job. Demonstrate
that you care and you will increase your odds with the lender.
8. Pie-In-The-Sky
Inflated, over optimistic sales forecasts or cash flow projections will derail your loan
application every time. A future too bright will blind the lenders and scare them off the loan.
Strategy Eight: Be realistic in your expectations, even if you believe you will be
floating on a sea of cash within months. No matter how lofty your financial aspirations might be,
know that businesses are usually not profitable for the first while. Estimate your sales
conservatively and your expenses a bit higher than you think they will be. Keep that cash flow
realistic and be sure to include ALL expenses.
9. Fish-Out-Of-Water Syndrome
This is what happens when someone tries to get into a business they know nothing about. It becomes
evident when the owner background reveals that the applicant has no prior experience in the area of
expertise that is the main focus of the business. For example, a heavy-duty mechanic might seek to
start a small restaurant. Not an impossible leap, just risky.
Strategy Nine: Know your business. It is so important to have a base of knowledge
about your business and experience where possible. Many successful businesses arise from
disgruntled or displaced employees who feel they can do as good as or better than their employer.
Enhance this background experience with solid market research, the Internet, courses, books, tapes,
and trade publications. Knowing your business will increase your confidence and enhance your loan
options.
10. Too Little Too Late
This point pertains to existing businesses in search of financial assistance after things have
already gone sideways. Too often we see the application when the accounts receivable is out of
control or major suppliers have already been hung out too long for scary large sums of money. Other
aspects of this condition are collectors hot on the trail and long overdue taxes. It's really
difficult to get excited about loaning money to pay for bills that should already have been
paid.
Strategy Ten: Be decisive when your business gets into rough financial waters.
Make the tough decisions early and then act on them quickly. If your recovery plan involves a loan,
you are far stronger coming to the table early with a well thought out plan, than later with a plea
for assistance to pay back taxes.
About The Author
Dan Boudreau makes business planning achievable, fast and fun. Want to learn more about how to do
your own business plan? Subscribe to the RiskBuster Newsletter and instantly download a free copy
of Dan's popular fast-track business plan template at http://www.riskbuster.com/letter/do-it-yourself-business-plan
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