Business plans play important but varied role in commercial lending: not always required--always necessary.

• Author: Barbour, Tracy
• Position: FINANCIAL SERVICES

Effective planning is an integral part of operating a successful business. And when it comes to the commercial loan process, business plans play a vital--yet varied role--for borrowers.

A business plan is essentially a communication tool, according to Wells Fargo Northern Alaska Business Banking Manager Jennifer Imus. It documents where a business is, where it's going, and how it intends to get there. And this information can be extremely helpful to the commercial lending process.

At Wells Fargo, the commercial loan application process involves the borrower sitting down and having an in-depth conversation with a banker. They discuss the business, how it plans to use the loan proceeds, and other pertinent details. An effective business plan can facilitate that conversation and provide a document to reference in the future to see if the plan met everyone's expectations.

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Though a formal business plan is not a requirement from a lender documentation standpoint, there is real value in having one, according to Imus. "You don't find a successful business person who does not have a plan--whether it's documented or not," she says.

When creating a business plan, business owners have to be good at telling their unique story, says Lynn Klassert, who recently-retired as director and business advisor of Anchorage's Small Business Development Center (SBDC), which is hosted by the University of Alaska Anchorage. There is no set format, but a business plan can include a variety of components: an executive summary, a company overview, a description of products/services, a marketing plan, financial statements, and an analysis of the company's strengths, weaknesses, opportunities, and threats.

However, borrowers can use various types of business plans to tell their story. Smaller ventures may only need a mini plan with up to ten pages. It provides an overview and answers to the "who, what, when, where, and how" questions.

Business owners seeking investors or partners could use a presentation plan featuring six to ten PowerPoint slides with bullet points and graphs. Or they might opt for a longer working plan that provides an extensive road map to show how the business operates.

As another option, a what-if or worse-case-scenario can help business owners plan for contingencies, whether they are starting, purchasing, or expanding a business. This can help them think through possibilities like what if something goes wrong with the economy or what if regulations change and make the cost of business higher than expected. "We want them to contemplate all the little details in terms of putting things together," Klassert says.

Client and Loan Terms Drive Lenders' Need for Business Plans

A business plan can be used to guide a company from year to year, and it should evolve as time passes. Yet it's not uncommon for borrowers to not have an existing or updated business plan, says a Northrim Bank Commercial Loan Officer and Vice President Brad Kiefer.

However, the role that business plans play often depends on the business requesting financing and the terms of the loan. Generally, a business plan is more important if a company is a startup versus an established entity. "If it is a mature company, I will ask for their historical financials," Kiefer says. "If it is a startup, it is a dead stop until they have a business plan."

Kiefer adds...