Two Business Plan Misconceptions

2010-01-30T22:26:00.000-06:00

As the economic recession looms on, stories continue about companies laying off thousands of employees. Some laid off workers are turning to their dreams and deciding to start their own businesses. This, of course, has led to an increase in the number of people needing business plans to obtain bank financing or funding from private investors.

I talk to several such people every day that ask about working with me to develop a business plan for their small business idea. In the course of these conversations, I have found a few common misconceptions about business plans and start-up funding, and I would like to take this opportunity to share my thoughts on these points.

Misconception #1: Private investors are the way to go these days

Stories abound in the news about banks struggling in tough economic times, much more reluctant to give loans to small business owners than they used to be. These stories have led to a misconception that small business owners should now look more towards private investors (venture capitalists or angel investors) instead of traditional small business bank loans. I don't believe this is accurate.

It is true that banks have become more strict in their review of small business loan applications, however this doesn't necessarily make VC's or angel investors a more viable option. Consider these facts: VC's and angel investors are looking to invest in a company that will give them a very high rate of return, as much as 300%; banks want nothing more than 8%-12% interest on their loans. VC's and angel investors, in order to help ensure a return on their investment, often times want a percent ownership in the business, sometimes as much as 40%; banks ask for no such ownership stake. This means that a large percentage of your company's profits will go to the private investor. More importantly, with as much as a 40% ownership stake in your company, a private investor may involve himself very much in the running of the business, questioning decisions the small business owner makes, ultimately resulting in a loss of control by the owner.

Finally, private investors receive literally thousands of business plans each month, all of them promising to be the "next big idea." VC's and angel investors are also looking for the next big idea, the next Microsoft, the next Google. Of the thousands of business plans they review each month, they may actually select one or two to investigate further. Therefore, the chances of obtaining funding through a VC or angel investor is extremely small.

Misconception #2: Banks and investors don't want to see a large detailed business plan

I am frequently told by people that they have heard that lenders and investors are too busy these days to read long, detailed business plans. Rather, they would prefer to have a simple 4-5 page document that summarizes the business idea and financial projections. Throughout my career, I have reviewed many plans submitted to my organizations that were requesting funding or investment, and I know several people that have been involved in reviewing business plans in roles as venture capitalists or corporate CEO's evaluating acquisition or merger opportunities. I can say, with great confidence, that I know of no one that would lend a business money, or invest in a business, without a detailed business plan that describes the business idea, market demand, qualifications of the business leadership, and detailed financial projections. When people make their living investing in business ideas, they require a large rate of return on their investment, especially VC's and angel investors. They will not lend, will not invest, without a detailed picture of the viability of the business.

Detailed business planning, and sufficient start-up capital, are essential to the success of a new small business. Whether your focus for start-up funding is a bank loan or investment from VC's or angel investors, a detailed business plan is necessary--a simple "summary document" won't do.

The Small Business Dream

Two Business Plan Misconceptions