Why having a business plan can strengthen your banking relationships

Smart practice

Wednesday 04 February 2015

The beginning of the year is a great time to create a business plan – or revisit and update an existing plan - to set your practice on the right path for the coming year. Importantly, having a business plan can also be a vital factor for any business in establishing and maintaining an effective relationship with a business banking partner, and the absence of a plan can be detrimental to this process.

The business plan can give focus and direction, and provide a foundation from which decisions can be made and actions taken. It crystallises what otherwise may be unrealised ideas, and can help the business owner articulate objectives and direction to its staff, stakeholders and clients.

Business plans come in a variety of forms, with the elements of an effective plan including how the business will generate revenue and resource itself and off what cost base it will do so. Importantly, it will incorporate an understanding of the assumptions underlying the revenue and cost bases.

Business banking relationships are built on trust, transparency and working closely together. From a bank's perspective, it is looking for a level of comfort in investing in your business; indeed the asset being lent against is the ongoing success of the business. A well thought out business plan shows a level of consideration, as well as a willingness to spend time and effort on something that is a significant undertaking and commitment of resources. If you don't put in that effort, it is difficult to expect a bank to consider providing funds.

Without a business plan, a bank can find it hard to assess how a business will make money and repay debt. Part of the lending process will involve the banker considering questions such as "how comfortable would I be lending my own money to this individual?" and "how confident am I about getting it back?" The level of risk associated with lending money is central to the decision on whether to do so.

A bank's need to be provided with a plan will vary depending on the maturity of a business and the tenure of the owner. For example, an established business with experienced operators is less likely to be asked for a business plan than a 'start-up' business or an established company with new, but inexperienced, owners. Historical data and demonstrated success will contribute to the assessment by a bank so owners of younger businesses are advised to have a business plan in place.

As important as getting a bank comfortable is finding a good match in a banking partner that understands the financial advice industry and your practice specifically. Detailing your plans and aspirations from the outset, such as succession planning or buying a business, and gaining the bank's buy-in to your 'bigger picture' can reduce the chance of surprises in the future. Banks need to be reassured that appropriate planning has taken place and agreed deliverables will be met, for example the capacity of the business to meet its repayment schedule.

A business plan can assist you and your bank to get on the same page, and help your business bank understand and support your business' future growth.

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