Many small business owners and entrepreneurs produce business plans quickly and without much thought or analysis. While having one is critical when seeking loans from a bank, the actual contents are even more important. This is often over-looked as most business owners are not familiar with what banks are really looking for.
The contents of a business plan are critically important to the banks’ lending decision process. It’s not enough just to have all the headings covered off in the table of contents.
So what are banks really looking for? In this article, we will discuss the important of market and competition analysis in the contents of a business plan. Both of which are critical to a banks’ decision-making process.
Demonstrated understanding of the key target market
The contents of a business plan include a detailed analysis of the industry and market segment within which the business operates. Beyond merely providing the estimated size of the market, and market share, banks look for analysis on the relevant market.
The following list of questions will be asked in one form or another by a potential lender to gain an understanding of the market segment the business operates in:
- What is the size of the market – what geographic area does it cover and what is the estimated turnover of the whole market in the relevant area?
- Where is it in its growth cycle, ie. Startup, mature, declining?
- What is the business’ estimated share of the market?
- How much will it cost for the business or competitors to enter that industry, ie. What are the barriers to entry?
- How competitive is it?
- Is it regulated?
- Is their demand?
- Who are the business’ direct and indirect competitors?
A potential lender will also focus on a detailed assessment of the business’ ability to:
- Attract new customers
- Attract and retain good employees
- Fully utilize operating capacity
- Reach its target customers
- Retain existing customers
These attributes are the key success factors for that business to operate successfully in their target market and are usually included in the Industry and Market Analysis section.
Understanding and analyzing the competition
Banks will keenly examine and question the contents of a business plan covering competition analysis. The competition analysis section needs to show that the business owner has an understanding of their business strategy and model, and how they might respond to any competitive behavior in the market place.
The content needs to identify the strengths and weaknesses of top competitors and identify the needs in the customer base that are not being fully met by the competition.
Getting an understanding of how competitors are performing financially will also help support estimates made about the returns a business might make in the market it operates. This feeds into the financial section as one of they key factors that will form the basis of realistic sales projections.
This analysis will also identify the opportunities and threats to the business. Opportunities that can be capitalized on and incorporated into a well articulated business strategy, and threats that need to be mitigated or managed.
What perspective do banks take when assessing the merits of a business plan?
Banks make a fixed return on loans made to small businesses, unlikely equity investors who take the first loss risk, and all the upside profits as recompense for that level of risk. This is why banks will always focus on the downside risks to a business in their assessments of the contents of a business plan.
Business owners and entrepreneurs need to highlight and address the existing and potential risks to their business in the contents of a business plan being presented in support of a bank loan application. Addressing and mitigating risks in this document will reassure banks that management is fully aware of the risks involved and have provided reasons why they are acceptable or show how they will be minimized.
By ensuring that the contents of a business plan cover off risk mitigation, the business owner will gain some credibility with the bank and thereby increase their chances of a favourable outcome.