Does a business plan guarantee funding?

In a survey by doctoral students, banks were asked about the importance of a business plan. Without exception, the top four banks in SA admitted that they place little importance on a business plan when they are faced with an application for business financing. What? Yes, you read it correctly. My immediate reaction was to question why this was the case. The reality is that people who work in a bank know little, if anything, about business. People with good business skills have no ambition to become bank officials or branch managers.

Besides the lack of knowledge to interpret a business plan, bank staff have no way to rate the risk of the planned business. They see a business plan merely as a piece of paper. They believe what really matters is the person behind the business. I have to admit, I fully agree with this logic.

So am I saying that a business plan is not important? No, I still rate a business plan as an extremely important component of starting or expanding a business. Writing a business plan “forces” an entrepreneur to plan their business, work out details, make projections and overall to provide a blue print for starting out. On this point, let me say that a business plan must be written by the person starting the business, and not by a business consultant. By writing your own business plan, you develop targets that you feel committed to, you understand the challenges facing you and you will be far more determined to push ahead and to make a success. Fact remains – a business plan is integral to success, but does it guarantee financing? The short answer to this is no.

Banks will look at the person applying for the finance. Previous credit history, income, stability and all the other credit factors will be taken into consideration. So if you do not have a great credit history and a regular income, forget about approaching the banks. You are wasting energy that should rather be channelled into starting your business.

The government, particularly Department: Trade and Industry (dti), has many initiatives for business financing, some which are run very efficiently. Check out their website www.dti.gov.za. However, you need to be part of the affirmative action designated groups, to qualify for most of these resources.           

So how do I suggest you get financing for your new business?

When faced with this question, my first answer is to tell the entrepreneur to limit finance requirements. Does that mean I believe that the old saying “It takes money to make money” is not true? Yes and no. Of course if you have access to a lot of money you need a lot less talent and skill to be successful. But having a lot of money is not the reality of 99% of the population. As most people do not have the money to start a business, they should try to minimise their cash requirements. It is much easier than you think.

Start small, test your idea and grow the business with funds that you generate. If you manufacture steel gates, you do not have to rush out immediately to buy a delivery van. Borrow or rent a van or trailer from your friends, neighbours or the rental agency in your area. Start the business in your backyard before renting a workshop. Appoint sales staff on a commission-only basis, let your wife, husband or children help you with chores like answering the telephone or preparing invoices. If you are starting a business to have many assets and staff, you should seriously question your reasons for starting in the first place. Take baby steps, work hard and taste the fruits of your success in the medium term.

If you still need financing, consider friends and family. They know you best, and unlike banks, can better judge you as a person. Offer them a share in the business and limit the interest rate if you have to repay them. If you are certain about your success, then offer to buy their shares back at a pre-determined date in the future. Offer your friends and family a job only if they have a special skill that will contribute to the business profit. A retired uncle with the necessary business knowledge will be a great asset to a new business. 

Business angels are another good source of financing. According to Wikipedia, an angel is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organise themselves into angel groups or angel networks to share research and pool their investment capital. For further information Google “business angel”.