The basics of business plans and loans

Looking to start a business in the U.S.? You've got company. According to the U.S. Bureau of Labor Statistics, there were nearly 700,000 registered companies in the country less than a year old. These small businesses, startups and entrepreneurs were responsible for adding around 1 million jobs in 2015, accounting for approximately 46 percent of all employment in the U.S.

"Starting your own business requires a detailed plan of action."

If you think you have the next big idea for a blockbuster corporation, or just feel confident that you know how to improve an age-old business model, it might be time to start your own company. But if you looked at some of the more sobering BLS entrepreneurship data, you could have second thoughts. On average, around half of all businesses do not last more than five years, while only 20 percent can be expected to make it 20 years.

The challenges of beginning a business venture shouldn't dissuade anyone from realizing their opportunities, but it takes a great deal of planning to get a company off the ground and on a path toward success. That's why having a written document that lays out a business's goals is crucial.

Business plan basics

According to the U.S. Small Business Administration, the typical business plan serves as a roadmap for the first three to five years of any commercial venture. By putting a good deal of time and effort into crafting this document, the plan should serve as a benchmarking tool for revenue growth, achievements, investment and other major milestones.

Besides serving as an organizational guide, business plans are also essential for acquiring funding in the form of loans. There are a number of public and private institutions that will underwrite loans and grants for companies of all kinds, but they almost always require a codified outline and description of objectives in the form of a business plan. Every funder will have its own specific requirements for a business plan, but there are some basic points it needs to hit, as Entrepreneur Magazine explained:

  • Executive summary: To put it simply, a business plan needs to explain how the company will make money. Startups and entrepreneurs will often want to present a common problem that their business can solve, and detail how it will compete in the market. The executive summary should include a mission statement and a basic background of key points about experience and products or services offered.
  • Market analysis: Even the most successful businesses don't exist in a vacuum - they tend to simply build on past successes or capitalize on another company's weakness. By performing an in-depth market analysis, it's possible to understand why your business has a leg up on the competition. Think about what your ideal consumer wants but can't find elsewhere.
  • Organization and management: Even for a business of one, there still needs to be clear guidelines for organizational roles, titles and duties. Many business plans include an organizational chart (org chart) with a hierarchy of leadership and clearly defined roles in pursuit of the company's objectives.
PlanA well-made business plan is essential for acquiring startup financing.

Staying focused

No one can predict the future, but in the process of creating a five-year business plan, you might wish you or someone close to you could. To stay on target while crafting the document, Entrepreneur Magazine's Carolyn Sun reminded writers keep their audience in mind, be realistic, and most importantly, not lose sight of the overall perspective.

The audience of a business plan can be difficult to nail down, since the document can serve as a tool for both potential lenders as well as the writers themselves. This obstacle could be overcome by simply writing different versions of the plan - one for internal use, one for pitching to funders, or any other particular variation that might be helpful. This might take some extra work, but it will prove invaluable down the road.

In a similar vein, entrepreneurs can't be afraid to revise the plan once the company is up and running. In fact, it might not be a bad idea to stray completely from the plan if conditions turn out vastly different from what was expected. The founder of a software company told Entrepreneur Magazine that he would meet with a management team each month to compare the original business plan with the company's actual results. From there, the team would revise the plan and set a new trajectory based on initial experience.

Finally, a good business plan needs to be realistic, even if that means being frank about risks, challenges and potential for failure. For starters, a plan with obviously inflated or unattainable goals for revenue will only hurt a business, especially when it comes to attracting financing. Any projections made should be backed up with research, data or concrete reasoning to explain why they are within reach.

Finalizing financing

Whether it's a corner store or a global corporation, many companies rely on business loans to get up and running, or to expand and seize a market opportunity. A loan can accomplish all of these, but they also come with their own unique risks. Understanding the ins and outs of business lending will allow entrepreneurs to make informed decisions about the future of their enterprise.

In most instances, a business loan isn't much different than any other conventional form of financing. Once a business applies for a loan, the lender will check to make sure the borrower has the ability to pay it back, in addition to any interest. As legal advice website Nolo explained, the lender may also require some form of collateral before making the loan. In a typical mortgage, the collateral is the home itself, and if a borrower can't make regular payments, the lender has the right to own the home. Business collateral might take the form of any property owned by the business, including real estate or equipment.

There are also several laws that pertain specifically to business loans, which vary from state to state. For example, as Nolo explained, many states have usury laws limiting the amount of interest a lender can charge. This is generally no higher than 10 percent, but business owners should check their state's laws to be sure they are getting a good deal.

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