Maybe you are able to finance your new business yourself or borrow from your brother, in which case you won't need to prepare an elaborate loan proposal. On the other hand, chances are good that you will need to borrow from an outside lender, either at the outset or later after your company is up and running. Besides, it's a good idea to proceed at this point as if you were going to borrow from an institution and to prepare accordingly. The reason is that formal preparation will force you to think through all aspects of your business idea. It brings you down from the clouds and introduces you to hard reality.
The first thing you should do (any traditional lender will require it) is to prepare a complete business plan, which describes in detail what your company will do, how it will do it, how much start-up money it needs, how the money will be repaid, etc.
As you look over the sample business plan below, you will see that it requires a lot of information. Chances are, you already have a lot. Since you're obviously serious about launching your own business, you're probably a pretty sharp person who knows a lot about the industry involved. You may well have worked in that field as an employee for years.
But is your knowledge as complete as you can make it? Do you know exactly who your customers will be? Do you know the dollar size of your market? How many competitors you will have? What percentage of the market you plan to capture? What is your projected income for the first month, the second month, the first year?
Many questions you can answer merely by thinking things through or by discussing them with associates. Others will require research. Start by making a brief business plan to expose the gaps in your knowledge. Then go to the library to fill in the gaps. Libraries today are computerized. No more shuffling through the card catalog or perusing the Reader's Guide to Periodical Literature.
Instead, you work with a keyboard and a monitor. With the help of a librarian, master the computerized search system, and then explore the digitized world of information. You will discover that you can find just about anything you want: books, articles, statistical abstracts, speeches, maps.
But sometimes, even after you've become a skilled cyberspace detective, you still may have no idea how to find a particular bit of information -- for instance the U.S. Department of Commerce statistics on imports for 1995. That's when you go to the librarian and ask. Generally he or she can direct you to exactly what you need.
When you think you have amassed enough data, work out your full business plan. You are almost certainly going to need the help of expert consultants--at the very least an accountant and a lawyer.
Constructing a business plan is hard work. But it can be exhilarating--if you're the right kind of person. Not everybody is. You need the proper temperament.
Now it's time to prepare your business plan. The following sample format is just that: a sample. There are no rules for doing a business plan any particular way. Nor is there an accepted length; your plan may be 10 pages or 200. Just remember that the purpose is to make every aspect of your business clear to you and others and to answer any questions a potential lender might have. You will take the plan (along with a couple of other items that we'll mention) with you when you meet with a lender.
State the name of your business, your name, address and phone number, and the date.
Give the page number of every topic and subtopic. This makes it easy for you and prospective lenders to refer to sections of interest. It also makes it easier for you to answer questions.
This summarizes the business you envision and explains briefly how you will establish and operate it. It should make it clear to the lender what your business is all about, how it fits in with the industry it is part of, and how you plan to make it succeed.
Keep this section brief, one to five pages. Employ flat statements, not explanations. But make it clear that information summarized here will be explored in depth later in the plan.
Stimulate the lender's interest. Otherwise he or she may never read the rest of your plan. Make him or her believe that you have a realistic plan for a business that will succeed (and pay back the loan). Of course, you don't do this by exaggerating or falsifying anything.
If you already have a management team you plan to hire, give each person's name, age, and one sentence of background. Do the same for outside professional advisers.
Explain your business idea with great thoroughness and tell how you arrived at it. What exactly is your product or service? How much will you charge for it? What about your customers--will they buy at your location or order by phone or mail?
If you are going to manufacture the product yourself, describe the production process, including facilities, machinery, and labor required. If you aren't going to produce it, describe your suppliers, their location(s) and charges.
In this section you should also discuss your projected sales and profit margins.
Describe the size of your market, in number of customers and dollars. If you can give some history of the market (for example, showing trends over the past 10 years), so much the better. (Aren't you glad you went to the library?) What type of customers are you shooting for? Upscale? Middle-class? Lower-income? Young? Middle-aged? Senior? What is your estimated market share?
Who are your competitors? If there are only a few, give their names, locations, and sales volumes. If there is a large number of them, list what characteristics you can without giving individual names. Also make a case for how you can compete successfully against them. Have you perceived a market within a market, known nowadays as a "niche" market? Describe it and explain how you will capture it.
Go into detail here about all aspects of getting your product/service and customer together: advertising and promotions, pricing, selling, delivering, and servicing. Explain how you have a workable strategy for marketing your product or service compared to the way your competitors do it. Tell what your objective is--for example, to capture 25 percent of your target market within one year.
If you have a management team, here is the place to show how impressive its members are. Give their names, ages, and current positions. List their educational attainments (if relevant) and employment histories. In particular, describe their past business successes. (Lenders are known to be extremely fond of managers with impressive records.) Make clear what each person's role will be in your new company. And don't forget to include your outside advisers, such as lawyers and CPAs.
Here's where you pose the question: How much money will be needed? You require enough money to get your company up and running and to keep it going until it's producing enough income to pay for its operations and to pay off your loans and purchases. But exactly how much is that in dollars? An excellent way to figure out how much you need is to use the following worksheet devised by the Small Business Administration.
| Item | Expense |
| Salary of owner-manager | _______ |
| All other salaries and wages | _______ |
| Rent | _______ |
| Advertising | _______ |
| Delivery expense | _______ |
| Supplies | _______ |
| Telephone and telegraph | _______ |
| Other utilities | _______ |
| Insurance | _______ |
| Taxes, including Social Security | _______ |
| Interest | _______ |
| Maintenance | _______ |
| Legal and other professional fees | _______ |
| Miscellaneous | _______ |
|
|
| Fixtures and equipment | _______ |
| Decorating and remodeling | _______ |
| Installation of fixtures and equipment | _______ |
| Starting inventory | _______ |
| Deposits with public utilities | _______ |
| Legal and other professional fees | _______ |
| Licenses and permits | _______ |
| Advertising and promotion for opening | _______ |
| Accounts receivable | _______ |
| Cash | _______ |
| Other | _______ |
| TOTAL ESTIMATED CASH NEEDED FOR START-UP | _______ |
Make several photocopies of the worksheet so you can do your figuring and refiguring without too many erasures. Take the figure at the bottom of the sheet (TOTAL ESTIMATED CASH NEEDED FOR START-UP) and subtract from that the amount you are investing. The difference, of course, is how much you need to borrow. (Actually, you should over-estimate every cost somewhat to allow for the unexpected.) Include a neatly filled-in worksheet in this section of the business plan for the benefit of the lender.
Once you sit down and do all that math, you may be appalled at the huge sum you need. On the other hand, you may be gratified at how little. About one in three small-business start-ups require an initial investment of less than $10,000, and about one in four needs $50,000 or more. Of course, you may need a lot more than that.
For your benefit and that of the lender, include a month-by-month projected balance sheet for one year, a projected balance sheet for three years, a projected profit-and-loss statement for one year, another for three years, and a cash-flow forecast for one year.
All these documents together give the lender an estimate of the cash you will have available each month and help him or her judge your ability to pay back the loan. Unless you're an accountant yourself, you're probably going to need one to help with these financial documents. One final item you should prepare is a personal financial statement.
Important: You can get valuable free help from the Small Business Administration in organizing and drafting your business plan.
Business plans vary, depending on the type of business, potential lender, and other considerations. For example, if you were going to do a lot of exporting, in addition to domestic business, you would probably include a section on your foreign operations. And if you are applying for a loan or loan guarantee from the Small Business Administration, it might be helpful to put in a section on new jobs to be created.
The SBA has some excellent info on business plans.
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