How to write a business plan for a loan: a step-by-step guide

When you’re looking to secure a loan for your small business or start-up, one of the most important steps is creating a business plan. 

This helps lenders to understand whether or not your company is financially viable, how you plan to make money, what the growth prospects look like and ultimately whether you are a good investment.

What is a business plan for a loan?

A business plan is a document that describes your business goals and how you plan to achieve them over a set period – typically two to five years.

It includes important information such as your financial forecasts, your cash flow statement, your skills and experience, your target customers and market research.

You should also include things like sales and marketing plans, and any information about plans for offices, employees and the tools or equipment you’ll need to run your business over the next five years.

How is a start-up loan business plan different from an ordinary business plan?

Ultimately, there’s not much difference between a business plan for a start-up loan and an ordinary business plan. Everything that you have in your business plan already should also go into the one you provide to potential lenders.

However, if you’re applying for a loan, you should include a funding request section. This should detail the exact amount of money you’re planning to borrow, what you plan to use the funds for, whether you’re likely to need additional funding in the future, and your repayment plans.

Do I need a business plan to get a loan?

Not necessarily. For instance, if you’re applying for a government Start Up loan (for between £500 and £25,000), you also get business advice, including help writing a business plan.

However, it’s always a good idea for any business to have a plan, and if you’re seeking funding from banks or other lenders, they may ask to see one.

What lenders look for in a business plan

Lenders typically look for clear, concise business plans that focus on demonstrating business viability, repayment ability and responsible use of loan proceeds.

Key sections lenders expect you to include in your business plan are:

• Financial forecasts: These detail how much money you expect to make, what costs you anticipate and where your funding will come from. 

• Financial health: Lenders want to see that your business will be financially viable, and that you will be able to repay the loan on time and in full. You need to include detailed information about your revenue, assets, liabilities and the repayment of any existing or proposed debts

• Cash flow: You need to have a detailed cash flow projection, which should include various scenarios. The lender needs a clear picture of when money is flowing into the business and how this tracks against liabilities, such as salaries, loan repayments and other bills.

• Market research and evidence: Lenders want to see that you’ve done your research and based your projections on clear evidence. Unrealistic assumptions or overly optimistic sales predictions could act as a red flag. This research should include an analysis of other similar businesses and show a clear rationale for your pricing decisions.

• Debt-to-income ratio: Lenders want to know how much debt you currently have, and how this compares to your income. Banks and other funding providers need to establish whether you will be able to repay the loan you’re applying for.

How to write a business plan for a loan

Step one: executive summary

The executive summary should be a short one-page document that outlines the key points of your business plan and sets out your company’s stall. It should be succinct, backed up by evidence in the subsequent pages, and entice potential lenders or investors to read further. 

Step two: business details

You need to include all the details of your business, including its name, what the unique selling proposition (USP) is, and your short and long-term financial and business goals. This should include the things you want to achieve over the next two to five years.

If it’s a new business, this should also include information about its start-up needs, as well as any relevant experience that you have that demonstrates your ability to run the business well.

Include information about what problem your business solves or a gap in the market that it fills. This helps demonstrate why there is a need for your company and why it will be a success.

This is also the section where you should outline your pricing decisions. So, if you’re setting up a company making jewellery, you need to detail how much you expect to sell pieces for, your direct costs and the gross profit and percentage per item.

You should also estimate your overheads for the first year, and then use this to work out how much you’d have to sell to make a profit. 

If you’re selling a service, for instance, as a freelance writer or a consultant, you need to think about how you’ll charge people. For instance, you could charge a day rate or per project. You need to include this information to show how the company intends to make a profit.

Step three: market analysis

This is the section where you show that you’ve done your research on your potential customers and your competitors. You need to show that there is enough demand for your business to make it viable.

You should establish whether your market sector is currently growing or shrinking and what the reasons for this might be. You should also make sure that you’re aware of any recent or upcoming legislation that might impact your business.

For instance, if you plan to be a landlord, it’s important to include changes to tax rules and shifts in buy-to-let mortgage rates.

If you’re selling things, you need to think about whether your product is something that people buy once or if you’re likely to get repeat orders. You also need to think about how customers will buy your products, for instance, over the phone, online or in a shop. 

You should have a very strong idea of who your customers are, and this includes things like gender, age and income bracket. You need to demonstrate why your products or services meet their needs and why they are different to your competitors’ offerings.

You should be able to list out some of your key competition, and demonstrate how your business will compare. For instance, will your products be better, or are your services completely unique, or is there some distinction that means you can charge more, or can you offer a lower price?

Step four: sales and marketing

You need to demonstrate to potential lenders how you plan to attract customers. This means building awareness and convincing people to choose your products and services. You should include a detailed marketing budget, including how much you plan to spend on various initiatives. This could be things like advertising, public relations and even events. 

You should also demonstrate how you plan to measure success. Note whether your competitors are using similar marketing methods, and if so – how your product will stand out.

Step five: financial plans and forecasting

This is one of the most important elements of your business plan because it shows potential lenders whether you are a viable candidate for a loan.

You need to include a:

• Sales forecast

• Profit and loss statement

• Cash flow statement

• Balance sheet

• Capital expenditure budget

• Break-even analysis

Read more: How to create the financial section of your business plan

Step six: funding requirements

You should also include a section on funding, which details the loan you are looking for and how you plan to repay it.

Be specific about exactly how much money you need and what you plan to use it for. For instance, you might want a cash injection to cover your start-up costs, or – if you’re expanding – you might need a loan to take on new employees. Alternatively, you might be looking for funding to buy a premise or to get new equipment that will boost your business.

You should also mention if you think you might need any more funding in the future, including how much you expect to need and where you plan to get it from.

Finally, explain how you plan to repay the loan, including a schedule of when the money would be repaid. Make sure you’ve done the research on the lender and what it typically offers. For instance, don’t include a ten-year repayment plan for a bank that only offers loans for up to five years.

Step seven: risks and contingency plans

You should outline the key risks to your business and the impact they will have. This should include any plans you have to mitigate or transfer the threats.