If you want to set up a business, one of the most important considerations is whether you should seek financing. However, to figure this out, it’s very important to understand first what a business plan is. After this, it easier to learn how to go about getting financing for your new business.
What Is A Business Plan?
A business plan is a document used by entrepreneurs to determine the following:
- Purpose of the business
- An overview of the products or services, target customers, and potential suppliers
- Marketing and sales direction of the company
- Financial status of the company
- Short and long-term business goals
- Projected profit and loss statement of the business
To remove any confusion regarding the course of the company, it’s ideal if the business plan is written in a commonly-accepted format. Using a widely recognized format for the business plan will help finance companies like Scottish Pacific Business Finance to clearly determine how much financing your new business will need.
What Is Financing?
Financing simply refers to an entrepreneur seeking a source of funds for their start-up company. There are lenders such as banks which are known for lending out funds so that entrepreneurs will be able to reach their target business benchmarks. An entrepreneur will usually be able to get the right amount of financing by presenting a well-written business plan to the lender.
Why Do You Need Financing?
1. Set Up Your New Business
Without financing, an entrepreneur would have a harder time reaching their business goals. While it’s possible to go without an external source of funds, it can be more difficult. Unless you have financing, the new business would have to be set up with your personal funds.
Since businesses are quite competitive nowadays, Entrepreneur.com recommends writing write a business plan so the lender can see the future prospects of your new business. The lender may then feel optimistic that you can repay them after the business has stabilized and becomes profitable.
2. Fuel Business Activities
The process of starting a business would be chaotic if you neglected to make a business plan first. With a well-written business plan, you’ll see more clearly what business activities should be prioritized.
You should know how well the business is expected to perform, since the source of financing must eventually be paid with interest. Essentially, this means that you have to be reasonably certain that you’ll reach profitability within the pre-agreed-upon time frame.
3. Identify Strengths and Weaknesses
Every business owner has to perceive accurately the strong points and weak points of their start-up. This can be seen when you write a complete and comprehensive business plan. This site recommends avoiding unclear, incorrect, or unrealistic financials when drafting your business plan.
If it’s written down, you can better see your business the way a lender perceives it. This also represents an opportunity for you to make changes in the business plan with an eye towards securing financing and reaching profitability, just as lenders do.
4. Help You Borrow a Definite Amount
Sometimes, you might need help when you’re trying to figure out how much financing you need. This is why you have to collaborate with a reputable lender to know the definite amount you need to borrow. In return, the lender will ask you for a definite interest rate on the loan amount. This way, you’re both able to reach your respective business targets, as far as financing is concerned.
5. Help Lenders Determine If You’re Trustworthy
In business, all relationships ideally should be grounded in an atmosphere of trust. The lender-borrower relationship is key to getting adequate financing for any start-up.
The lender’s objective is to figure out if you can be entrusted with a line of credit. You then have to prove that you can be counted on to repay the loan at the interest rate previously agreed upon. If the lender isn’t convinced that you’re trustworthy, the business will stay just as it is, until you can find another lender to secure financing from.
6. Project Business Growth
A business plan is meant to project the progress of the new business over a five-year period. This means that you also need to come up with contingency plans should certain anticipated events come to pass within those five years.
In a nutshell, your business plan should include a financial forecast. When the lender sees your business plan, they can point out some risky events that you may have overlooked. Your business plan will also help you identify future growth plans, should the new business do very well.
7. Project Future Business Targets
A key part of any business plan is the timeline for reaching business goals and targets. Both you and the lender have to agree when progress has been achieved. Once the business targets have been reached, you’ll then need to determine if the business needs another influx of cash. This means that you have to draft a new business plan and sit down with the lender to negotiate for a new line of financing.
This process of applying for new financing is easier if your previous business targets were reached satisfactorily, because it shows the lender that you can keep your end of the bargain. There is a level of trust that will be helpful in directing the future progress of the start-up company, should additional financing be required.
A business plan is relatively easy to make, once you’re aware of its usual components and the accepted format. With a business plan for your start-up, potential lenders can spot areas in the performance projections that may need more analysis and work. You’ll can use your business plan to see how much financing your company needs at the start.
A well-written business plan should help lenders spot businesses that are still small but have great potential to grow into profitability with sufficient financing. You can rely on your business plan to help you secure sufficient financing so that future growth will be achievable for your start-up. With enough resources from the lender, you’ll be able to reach business goals, pursue growth, and ensure profitability within the timeframe agreed upon with your lender.