The Role Planning and Budgeting Can Play in Securing a Business Loan

No commercial loan lender will take the risk of granting your business loan without you first demonstrating you have what it takes. This means you can demonstrate, via your business plan and other documentation, that you have the ability to repay the loan and the willingness and commitment to ensure the success of your business. In other words, you need to become diligent about your budgeting and planning as key elements in your overall business map to profitability. Your loan proposal will be enhanced or diminished as a result of your attention to these two aspects - both of which should be prominent in your business plan.

What Does Budgeting Cover?

A budget, in the simplest terms, is a plan that demonstrates you'll have the needed money to invest in your business and future business activities backed by solid figures and projections - not based on guesswork and instinct. Your budget should encompass what you want your business to achieve, a planned outcome. Creating a budget and the process of budgeting involves planning.

Budgets typically cover one year, and include a plan for utilization of manpower and material resources, an estimate of future costs and revenues, and may be divided into capital budgets and operating budgets. At the end of the year, actual business performance is tracked against forecasts of anticipated income and expense.

Elements of budgets include:

  • Managing Cash Flow - where your money comes from and where it goes. Cash comes in through sales and goes out through expenses.
  • Cash Flow Analysis - planning and preparing for future market changes and events. This projection can demonstrate to your business loan lender that you have the ability to pay back your loan, make pricing adjustments, decisions on staffing and equipment, identify expenses, and shows how much you need to borrow and when.

What Does a Business Plan Cover?

The business plan is a key part of your overall loan proposal for your business loan. A business plan includes budgets and cash forecasts, but it also includes much more. In a business plan, you are defining your business and identifying your goals. It includes laying out for your lender specifics on the qualifications, education, expertise and skills of the owners and key management team in your business, a balance sheet and income statement, cash flow analysis, marketing analysis and supporting documentation.

Beyond the fact that a strong business plan is the foundation for obtaining your business loan, it also serves as a roadmap for your growing business success. In essence, it is a blueprint for you to follow, providing step-by-step guidance on what to do in order for your business to achieve its intended goals.

Why Should You Plan?

For your business to achieve success, you want to do everything you can to maximize your outcomes and minimize your risks. Business planning helps you achieve these goals. Creating a business plan, for example, forces you to take an objective look at your business. It provides an operating tool to help you better manage your business, which will also help you down the road should you need an additional business loan. And it provides not only the basis for your financial loan proposal but also serves as a good communications tool to suppliers and other key constituents.