What does a lender actually read in a business plan?

Why lenders require a business plan

A plan is required whenever there is no operating history to underwrite: a startup, an acquisition by a new owner, an expansion into a different model, or a construction project. The financials show what the borrower expects to happen. The plan explains why it should.

It is also the primary evidence of management capability, which is one of the least quantifiable and most decisive parts of a credit decision. Directly relevant industry experience is the strongest single predictor an underwriter has for a new venture.

In an SBA acquisition, the plan additionally has to address transition risk: what happens to customers, staff, and vendor relationships when the seller leaves, and what the seller's role is after closing.

What it tells a lender about the business or borrower

How to complete it

1. 1

   Open with a one-page summary

   What the business does, what is being requested, what the money buys, and how it gets repaid. Assume this is the only page some readers finish.

2. 2

   Lead with relevant experience

   Years in the industry, roles held, results produced. Name the specific responsibilities that map to running this business.

3. 3

   Define the customer and the market with sources

   Cite the data you used. A local market estimate with a named source beats a national market size number that has nothing to do with your service area.

4. 4

   Explain the model concretely

   Price points, average ticket, sales cycle, capacity, and how customers are acquired. This is where the projections earn credibility.

5. 5

   Tie the plan to the numbers

   Every material assumption in the projections should be traceable to a sentence in the plan, and the funding request must match the use of proceeds exactly.

6. 6

   State the top risks and your response

   Three to five real risks with the specific mitigation for each. Underwriters trust operators who can name their own weak points.

Mistakes that send a file back

• Generic filler that could describe any company in the industry.
• A market size figure with no source and no relevance to the actual service area.
• Numbers in the narrative that do not match the projections or the funding request.
• No risk section, or a risk section that lists only risks with no downside.
• For an acquisition, no discussion of what happens when the seller leaves.
• Length used as a substitute for specificity.

Who needs a business plan

Startups, acquisitions, franchise purchases, construction and expansion projects, and most SBA files where the business is under two years old. Some lenders accept a shorter plan or an executive summary for a modest expansion by an established operator.

An established profitable business borrowing against consistent history often does not need one, though a short narrative explaining the project still helps the analyst write the credit memo.