Why does the Small Business Administration require a business plan, and in which cases does it matter most?
The SBA is a government agency created in 1953 when President Eisenhower signed the Small Business Act. The agency is designed to help small businesses score at least 23 percent of prime federal contracts through capital, contracts, and counseling. The SBA aids in getting loans through SBA-approved lenders and offers exceptional educational resources, including mentoring and workshops.
As part of the program, the SBA offers a 90 percent guarantee to lenders for small business loans. Because the SBA will assume such a profound risk, the SBA wants a business to prove they can make good on their investment. This proof is almost always required in the form of a formal business plan, although there are some exceptions, in cases where a less formal plan or proof of strong financials may suffice.
What a business plan entails
No matter what stage a company is in, a business plan is a must. It provides a glimpse into finances alongside a narrative. When a venture is in its planning stages, it can be too easy to throw money at any problem or inconvenience. That mentality is a surefire way to fail and the SBA knows it. A business plan provides the answers to hard questions about a business, such as a market analysis summary, who their target audience is, and organizational structure to demonstrate in-depth research and background check on those who will be involved in the loan.
One of the strongest reasons for the SBA requiring a business plan is simply for the financial elements that are included in a well-written business plan. To be more specific, the SBA wants to see well-supported financial projections that show strong cash flows (which are important to show you will be able to make timely monthly loan payments) as well details on how you plan to spend the loan to support the growth of the company.
The SBA provides training and counseling so small businesses can understand the different components of a business plan which can be found online at www.sba.gov. The SBA encourages owners to truly assess their businesses (e.g., strengths, weaknesses, opportunities, and threats) in order to be successful.
Why it matters
A business must have a solid foundation on which to grow. Thirty percent of new ventures fail during their first two years. Fifty percent fail during their first five years, and only 25 percent make it past their 15th anniversary. The odds would be higher if budding entrepreneurs would take the time to plan and understand finances so they can pivot when the market requires it. A business plan should be grounded with attainable goals and solutions to possible challenges. Costs, inputs, and timelines need to be figured out for the SBA to even consider a business plan.
“Your business plan helps provide a background on the people who will be running the business, outlines the intended use of funds, and helps you show the lender that your business concept will be profitable to allow you to effectively repay your loan,”
Gerald Padilla
Joorney’s Vice-President of Sales and Marketing
Pivot
The Computer History Museum and Apple recently released Macintosh’s preliminary business plan. The thirty-page document details the market position Steve Jobs envisioned for a company that would one day lead the world in technology. The content demonstrates that a business plan should address the pain points of a segmented market with a relevant solution. Think of the world without iPads and Macs. Now you understand the power of a business plan and how one ensured Apple’s success.
A business plan matters for every industry. The SBA is there to help small businesses reach their goals. Going from a vision to an SBA-funded reality is a challenge that our professional business plan writers are more than qualified to achieve. Increase your chances by requesting a quote from Joorney today.
