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, particularly in regards to providing lenders with this understanding and improving the chances of securing business loans. While they come in all shapes and sizes, the best format for providing this information is the business plan.

The main benefit of a SME business plan is that it forms 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, we’ve identified the following 13 areas asbeing worthy inclusions in your SME clients’ business plans. They are separated into Situation Analysis and Financials.  

Situation Analysis

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. 

1. Purpose

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. 

2. Operations 

The next area is to provide details of how the SME operates. This could include: 

• The management structure of the SME;
• Personnel numbers and roles in the business;
• Products and/or services of the SME;
• How products and/or services are delivered/provided by the business;
• Revenue stream areas from products and/or services; and
• Revenue collection methods and policies of the SME. 

3. Shareholders 

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 can be useful to help highlight these areas. 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.   

4. Funding

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. 

5. Industry 

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 answer 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. 

6. Competitors 

Competitor analysis also demonstrates how the SME has, or proposes to, differentiate itself and gain market advantage. It is important to compare like for like (similar businesses) in this section 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! 

7. SWOT 

A good way to summarise a lot of the above areas is to compile a Strengths, Weaknesses, Opportunities and Threats (SWOT) 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 SME client’s 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. 

Financials 

Because it is a financial transaction, lenders will typically 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, it can be good to note and cover the following points: 

9. Projections 

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. For example, when 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, services, or market segments that are generating income.  

11. Financial Ratios 

Lenders commonly use some standard financial ratios to assist in their analysis and make comparisons against other SMEs that they have either lent funds to, or declined 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. 

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 they are not only focused 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.      

Philip Dempsey is a former broker and trainer at educational training provider, elevateb.

In conjunction with industry experts, elevateB has developed a self-paced, online, interactive Business Finance Certification to help finance professionals learn the skills required to 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.