Good business plans make lenders say 'yes'
Written by Shirley Lichti for The Record, March 17, 2004

For many small business owners, applying for a loan can be an intimidating task. The fear of being turned down always looms in their minds.

Yet, when you consider that banks need to lend money to stay in business, it puts a different spin on things. According to a survey by the Canadian Federation of Independent Business, 90 per cent of loan applications made by small business leaders are accepted.

However, that doesn't mean success is guaranteed. It's important to understand the sources of financing, which range from banks and other financial institutions, venture capital companies, angel (or private investors) and funding programs offered by federal, provincial and local economic development agencies.

To get an insider's perspective, I spoke to four people who approve funding requests representing some of the sources of financing mentioned above. All of them stressed that to increase your chances of getting approval, the cardinal rule is: Do your homework!

Before you even approach a lending institution, be sure you have determined exactly how much money you need. Be prepared to explain in detail how you will use the money, how long it will take you to repay it, and what you can use as security for the loan.

You'll also need a business plan with at least a two-year sales projection. A well thought-out business plan is one of the most important items you can bring to a lender or investor.

"You'd never leave home without a trip-tik if you'd never been to Idaho before, so you must have a business plan," said Terry Campbell, a vice president at the Canadian Youth Business Foundation (CYBF) in Toronto.

CYBF is a national non-profit organization that assists young Canadians, aged 18 to 34, to learn about entrepreneurship and start successful businesses. Candidates are paired with a mentor and must complete a business plan before being eligible to apply for loans of up to $15,000 to cover start-up costs.

Campbell said that he looks at business plans to identify potential pitfalls that the entrepreneur may have overlooked in the hopes of making the plan even stronger. While some might find this prospect a bit daunting, people need to understand that being an entrepreneur is not for everyone. "You need to be resilient in case you run into roadblocks and detours along the way," he says.

Another program aimed at youth ages 18-29 is My Company, offered by the Ontario government in partnership with the Royal Bank. It combines hands-on business training and loans of up to $15,000 to help young people to start and run their own business. Candidates must complete 12 hours of business training and prepare a business plan.

Judy Hight, an account manager for small business banking who approves these loans at the Royal Bank in Cambridge, says "the plans that impress me the most are the ones where individuals show they have the skills to bring to the business." These skills are critical to instil confidence in a banker making a lending decision.

Hight also says she looks for enthusiasm, commitment and for a sense that the applicant has the right personality to see the business plan through. In her opinion, people who have been the most successful at getting funding are those who have been able to define their vision of the business with clarity.

If you are a high-tech company in the Waterloo area looking for funding, you might consider a venture capital company like Tech Capital Partners. It works with companies in the early stages of developing core technologies.

Associate Jacqui Murphy says Tech Capital looks for ideas with "incredibly strong value propositions, a huge market, and high growth" that have the potential to be at the heart of next-generation products.

While the business plan is important, Murphy says that she is much more concerned about the market opportunity. In other words, "Have you created a better mousetrap or will your product revolutionize the way people deal with mice?"

Differentiation is key for Murphy who needs to see how and why your product is better than others on the competitive map.

Most companies bootstrap their operations as long as possible, getting funding from friends and relatives so that when they approach a venture capital (VC) organization like Tech Capital Partners, they can show evidence that their proposed technology is feasible.

A VC shares the risk that goes with early-stage technology development, an important difference from most other sources of funding. Murphy advises technology entrepreneurs not to ask for more money than they really need because it means giving up more control of their company.

Her biggest pet peeve is receiving business plans that are not relevant.

"Too many people haven't done their homework," she says. "You need to understand who you are approaching. Take five minutes to visit the company's website to understand what geographical markets and industries are served."

Murphy cites an example of a business plan she received from a Hong Kong dating service as inappropriate because Tech Capital Partners only works with technology companies in the Waterloo region.

Most small businesses in need of funding will likely approach more conventional financial institutions. Moni Lagonia, an account manager of business banking with the Royal Bank, has been lending companies money for 12 years. As a veteran lender, she says she looks at the bottom line. "We are numbers-driven," she says.

Questions that Lagonia asks are 1) is there a business plan? 2) is it realistic? and 3) is it supported by the numbers? If she sees something really pie-in-the-sky in the marketing plan, she will back off. She notes one young entrepreneur whose sole marketing tactic was to send out a direct mail piece for which he expected a 70% response rate. (Industry average response rates for direct mail range between one to three per cent!)

Having a realistic plan is key for her, but she also looks at the experience of the entrepreneur. For example, if you are going to start a catering business, do you have any experience in catering? It helps show her that you have the ability to follow up your plan and put it into action.

While having a business plan is key, Lagonia stresses that it's not always just for the bank, "it's more for you. Often people make you feel guilty for making them do 'all that work'. It sure tells you a lot about a person's ability to succeed as an entrepreneur when you hear comments like that!"

While numbers are important, sometimes attitude and experience play a big role, too. The bottom line is that it pays to do your homework before you ask for funding.

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