Preparing a business plan for the bank

Banks tend to have a mixed reputation (to say the least) with their customers. Far too many companies seeking debt finance fail to understand the expectations and requirements of banks from business plans – the difference between debt and equity.

As a huge generalisation, banks want to see two elements from the business: security and cashflow. Security (from an asset, property, stock, customer order, pure cashflow expectations or even intellectual property) will give some comfort that the business will be able to repay the principal amount lent, and positive cashflow will ensure that the business can service the interest payable to service the loan.

They will also be interested in the management, the track record, the market etc, but the elements of security and positive cashflow differentiate the needs of bankers from those of, say, business angels, who are unlikely to be so concerned with anything other than growth and value.

Understanding this difference will help business managers to determine what form of finance will be appropriate. Early-stage businesses are unlikely to be able to generate the track record and positive cashflow required by bankers, although the Small Firms Loan Guarantee Scheme can be helpful. 'Lifestyle' businesses are unlikely to generate the returns required by business angels.

A business plan therefore needs to reflect the needs of the reader. A different style of plan is required for each type of investor.

Once you understand these separate needs, you can tailor the whole plan appropriately. Demonstrating risk aversion is useful, steady cashflows are ideal. In addition, timing is critical in determining whether a term loan or an overdraft or both is most suited to a business’ needs.

Many banks will have their own templates or software for creating a business plan, but beware. These can be a good starting point, but the key to success in writing the plan lies in the content and showing that it meets banking criteria.