You have your “big idea” and you’re ready to go. You’re itching to start a business and feel the sooner you launch, the better. After purchasing what you need on your credit card, doors open for business. When you need more supplies, you open another card. Later, it’s time for yet another card to transfer the balance for a better rate. Before you know it, you’ve racked up tens of thousands in credit-card debt.
What may sound rash is an all-too-common scenario among small-business owners. Many use credit cards or tap into their home equity to get off the ground. The consequences of such choices extend not only to personal credit scores but also to the very sustainability of a small business.
Plastic can get in the way of profit
When business owners use their credit cards for the business, they end up using the debt as though it is working capital for day-to-day operations. More troubling yet, they may find themselves stuck making interest-only payments on their cards.
Business owners optimistic about the ease of refinancing their credit card debt into a business loan may be surprised. They may be tired of making interest-only payments on cards with high interest rates in the 17 percent to 25 percent range. In order to refinance this debt into a U.S. Small Business Administration loan, borrowers have to show all receipts that demonstrate everything charged on the card was for a business purpose.
A better way to fund the launch of a new venture is to start with a business plan and apply for a business loan. The process itself tees a business up for success. Why? Because the market research, cash-flow forecasts and long-range plans are literally baked into the plan.
Setting the stage with a good business plan
A business plan serves as an introduction to your business for other entities that you work with. This document becomes your business card as you navigate the business world — whether it is the bank that may be considering your loan or the property manager who might lease you space for your business.
Articulating what your business does, its mission and vision as well as how you will execute your plan will show credibility and dedication. A business plan will include qualitative as well as quantitative information that translates to the financial projections for your company.
More importantly, the main purpose of a business plan is to serve as your roadmap to business success. This document guides your principles, goals and measurable outcomes. As a business owner, you could become lost without this document.
What lenders look for in business plans
Organizations such as SCORE (Service Corps of Retired Executives) and the Small Business Development Center at Salt Lake Community College have volunteers willing to help entrepreneurs with their business plans. There are also online tools available, including at www.utahsmallbusiness.com.
Because a good first impression is essential to success, be sure the business plan you present to prospective lenders includes the following:
• Cover sheet Make sure to include your business name and logo on the cover sheet. Don’t be afraid to be creative, but at the same time, it needs to look professional.
• Purpose. Although all businesses want to turn a profit, most also have a specific reason for existing. What do you envision your company becoming? For example, maybe you want to serve the best Italian food in the city or to be the No. 1 spa destination in town. The “purpose” is your ultimate goal for the business.
• Table of contents. It’s helpful to incorporate a table of contents into the plan for reference and to make the document look more professional.
• Business description and ownership. Here you describe what the business does and how it will deliver the product or service. Also, share the type of business structure and the names of the business owners. If your business has a production process, describe the process in detail in this part of the plan.
• Marketing. Discuss all your marketing strategies and how you plan to reach your primary target market in this section. It will also be used as a foundation for developing your marketing message that you’ll use for all forms of media, from print to direct mail.
• Competition. It is critical to identify who your competitors are and why you consider them to be competition. You will need extensive details, such as the competing company’s product selection, the level it is currently operating on and the degree of customer service it offers.
• Competitive advantage. Here you will describe the strengths of your business and how this gives you a competitive edge to capture your target market. Be specific on what makes your business better than similar companies and how you plan to share this information with your target market.
• Financial projections. These numbers need to be realistic and should reflect educated calculations. You should be able to explain what assumptions you made to reach your projections. As you work, please keep the following in mind: start-up cost and investment; break-even analysis; pro-forma income projections (profit and loss statements) for two years; and cash flow projections, also for two years.
• Other documents. These documents vary depending on the purpose of the business plan (example: expansion versus creating a new company) and the requirements of the financial institution you are working with. Examples include principal owners’ tax returns for the past three years (or returns from the business if the loan is intended for expansion), personal financial statements, a franchise contract, resumes and letters of intent from suppliers or vendors.
Taking your plan to a lender
The information you include in your plan will depend upon your specific business and what may be required by your lenders and investors. It is perfectly acceptable to first check with your prospective lender to determine their specific requirements.
When the time comes to talk to your banker, you’ll be prepared and organized with a solid plan. Be confident and sell them on you and your idea. You’ll feel better knowing that your realistic projections are viewed by lenders more favorably than showing a loss from existing credit card debt.
Ryan Shaw is Zions Bank’s business banking manager in Salt Lake City.