SME Lending – The Business Plan
With a tightening economy and falling house prices, lenders are more and more reticent to use business owners’ residential property as collateral for SME business loans. Instead, they are looking for understanding on the SME’s core business operations, financial stability and future profitability as the basis for loan approvals.
Business Finance Professionals have a key role to play in assisting their SME clients in providing lenders with this understanding and improving the chances of securing business loans. And whilst, they come in all shapes and sizes, the best format for providing this information is the Business Plan.
The main reason for a SME Business Plan is as a basis for decision making, business direction and goal setting. However, with possible minor amendments, they can be extremely useful to expedite a finance application.
From their feedback and in consideration of the lenders’ needs and perspective, the following thirteen areas as worth inclusion in your clients’ SME Business Plans. They are separated into Situation Analysis and Financials.
These elements are more descriptive and give the lender a strong sense of the drivers for the SME, the passion behind the SME and the business acumen that will ensure success.
What are the fundamentals of your SME client’s business? What do they exist to do? This short description should clearly outline what the SME does, the market or industry it works in and how it generates revenue.
The next area is to provide details of how the SME operates. This would include:
The management structure of the SME
Personnel numbers and roles in the SME
Products and/or services of the SME
How products and/or services are delivered/provided by the SME
Revenue stream areas from products and/or services
Revenue collection methods and policies of the SME
For most SMEs, the owners and major shareholders are the ones running the business and making critical decisions. The Business Plan should communicate to lenders the experience and expertise of the owners and how that relates to the industry, market and business the SME operates in. The owner’s CV is useful to highlight these areas.
And, where there are gaps in the owner experience or expertise, these should be addressed and covered via the management structure and the knowledge and skills of others in the SME.
There are two parts to this element of the Business Plan situation analysis. Firstly, lenders want to know the contribution levels (and indicative commitment) of the shareholders and owners. How did you fund the SME to get it started, and how will it be funded until it becomes profitable?
Secondly, and probably more directly related to the finance application, how will upcoming or future loans be utilised? A level of detail is important here and there should be a clear connection between the loan and how it will be used as a contribution to business growth. Lenders’ funding pools are not limitless, and the applications with the most merit in terms of business worth and low risk are more highly considered.
As well as business stability, lenders look deeper to assess the strength and potential of the industry and market your SME clients works in. The Business Plan should answers questions around the future demand and ongoing popularity of the products and services offered. It may also demonstrate consideration of opportunities or threats that could impact on the SME and the contingencies that have been tabled to address these possibilities.
Competitor analysis also demonstrates how the SME has or proposes to, differentiate itself and gain market advantage. It is important in this section to compare like for like (similar businesses) and drill down to the SME’s points of differentiation. These may include products/services, marketing, delivery, location etc. If your SME maintains they don’t have competitors, get them to think again – everyone has competitors!
A good way to summarise a lot of the above areas is to compile a Strengths, Weaknesses, Opportunities and Threats analysis. Further, a well-constructed SWOT analysis compares all of the areas of analysis and prioritises their importance and how they will be addressed.
For example – “Given the prevailing economic conditions and competitor analysis, our SME is going to focus on developing a product we don’t currently provide and which is in increased demand from our target clients.”
8. Marketing Plan
In the modern world, the way SMEs promote themselves is increasingly important. Word of mouth does not carry the same influence it once did and your SMEs Marketing Plan should show how it will attract clients as well as keep them. Target marketing demonstrates a well-thought-out approach which helps the SME be more specific with its marketing strategy and roll-out. Demonstrating what you know about your target market, how your products and/or services align to their needs and what their buying habits are, tells a lender you are positioned to maximise return on investment and your SME’s capacity to service the loan.
Because it is a financial transaction, typically lenders will focus their initial attention on the SME’s financials. This doesn’t mean you, or your SME client should ignore the situation analysis of the Business Plan. On the contrary, these are critical in establishing and supporting the figures and assumptions that are provided in the financials. For the financials section of the SME Business Plan, the following points are good to note and cover:
Remember, these are just estimates and assumptions. They should be best guesses and considered assessments and be backed up by the descriptions in the situation analysis. In the example of introducing a new product offering for the SME (as evidenced from the SWOT analysis), the credibility of revenue and expense projections would be enhanced if development costs were immediate and income generation deferred to reflect realistic anticipated product development time.
It can also be a good idea to show a range of projections – from conservative to best-case scenarios. Again, this tells the lender the SME is motivated yet circumspect and not just riding a wave of misguided over-confidence and bravado.
10. Use Broad Categories
The financials you provide for lending purposes do not need to be overly specific in relation to such things as revenue from individual products and services. These may be worthwhile for business management reasons, but for lenders, it may be overkill. The corollary is, don’t just project a single revenue line. Lenders want a sense of the range of products or services or the market segments that are generating SME income.
11. Financial Ratios
Lenders commonly use some standard financial ratios to assist in their analysis and make comparisons against other SMEs they have lent funds to, or decline lending requests. Pre-empting and providing these ratios with the financials shows alignment to best practice business thinking and shrewd financial management. These can also be referenced in the situation analysis of the Business Plan. For information on the more common ratios go to SME Lending – Key Financial Ratios
12. Additional Working Capital
Working capital refers to the available funds a SME has to fund growth or expansion. It is calculated as current assets less current liabilities. Typically, where this amount is insufficient to fund growth, additional working capital is required, and lenders are approached. Again, if the financials provided to the lender clearly set out the calculation of required working capital, it will demonstrate a strong grasp of the SME business and reasons for the loan request.
13. Return on Investment (ROI)
SMEs that set specific ROI targets are telling lenders that, not only are they focussed on overall business success, but they will be well-positioned to service their annual debt requirements. After all, the investment into a SME is a combination of owner ‘sweat’ equity (salaries forgone in the initial start-up stages), private equity (shareholder contributions) and debt (borrowed funds). All parties want ROI.
In conjunction with industry experts, elevateB has developed a self-paced, online, interactive Business Finance Certification. This program will provide you with the knowledge and skills required to become a successful Business Finance Professional and work in the SME space. In addition, it provides strategies and soft skills to assist you to better market and deliver your existing and new-found client offerings.
For more information on the Business Finance Certification, click here.