Now for many people, the thought of creating a business plan is akin to the fear of public speaking. However, it does not have to be such an unpleasant task, especially since we already have the information. Our personal financial statement, the project due diligence and the market analysis comprise just about all of the information needed. All we need to do is to organize this information into a coherent document.
Our business plan is an opportunity to present ourselves and the deal in the best possible light. It is designed to give the lender an in-depth look at yourself as a borrower including your past successes, the reasons why this project is so strong, and the reasons it will succeed in this market. This will all be supported by facts from your research and due diligence.
Reasons for a Business Plan
A written business plan speaks louder than anything you say or do when applying for the loan. In addition, a written plan may be the only information the loan committee or board can refer to when looking at your deal. The business plan speaks for you when you are not present. It is extremely important to create a professional, organized, document proving that you have done your homework and can manage the risk that is inherent in all facilities.
There are several software packages and numerous resources available to assist you in preparing a business plan. Some are very good, but few are tailored specifically to real estate. Most business plan templates are just that; templates. They are designed using generic terms for operating a multitude of small businesses. However, a business plan and subsequent loan request for real estate requires many different elements. You may find that the effort involved in adapting a template is more work than writing a plan from scratch.
In addition, I recommend writing your own plan because of the knowledge you will gain in the process of doing so. By assembling the information again and presenting it in a clear format, you gain an even better understanding of the project that allows you to explain it in detail when the time arrives. This creates a perception of confidence in the lender's eyes during conversations regarding you and the facility, and anything that reduces risk on the lender's part is a positive step in the right direction.
Lenders see hundreds of proposals each year; some are good, others are not. A thorough plan makes their job much easier when pitching your deal to the board. I strive to ensure that my business plan and loan proposal are one of, if not the best proposals they will ever see. Some of the smaller community banks I have relationships with only approve so many loans per year, and I want to make sure that my proposals make it to the top of the list in the month that the committee or board meets to review and approve requests. And so far, I haven't lost yet!
I must remind myself that perception is a reality for the lenders. They do everything possible to avoid risk, but they know that every deal involves a certain amount. Their approach is to look at every deal as if it was a loser and must be proven to be a winner. My personal financial statement is designed to project stability, and my loan proposal is presented in the exact same manner. A good loan proposal will convey the message that I have the necessary resources and abilities to succeed in the project being proposed. This is critical to obtaining loan approval and funding for the facility.
Elements of a Business Plan
The ability to professionally package and present my proposals, I believe, has been a major advantage in getting my deals funded. My plans spell out very succinctly what I am going to do, when I am going to do it, and how I plan to do it. In my opinion, there are seven critical elements that should be included in any business plan and subsequently, your loan application:
7 Essential Elements of a Loan Application
1. Projected Financial Statement
2. Amount of Funds Requested
3. Requested Loan Terms and Length
4. Source of Repayment and Collateralization
5. History of and Nature of the Business
6. Repayment of the Loan (including plan B should things go awry)
7. Timeframe for Approval
I try to summarize those first 7 questions on the first 2 pages of my business plan to make it easy for the lender to get a quick snapshot of what I'm attempting to achieve. Remember, you are relying on your loan officer to present this request for you to the loan committee, so make it as all-inclusive, yet as simple as possible for him to do in your absence. Your ability to prepare your loan officer for this task will be the key element in gaining loan approval for your new facility.
Do not, I repeat, do not send him or her in to the committee or the board with a disorganized, unprofessional mess of papers, and don't leave it up to him or her to explain why you should be approved for the loan. I spell this out myself in my business plan which highlights my experience, past successes, and my confidence in the project being proposed. They should come to the conclusion that if they don't fund this loan for me, then the competition certainly will.
My plan is written as a combination business plan and loan application that focuses primarily on the subject property I want to acquire. It includes a summary of my past experience and successes, my present portfolio of real estate, and pertinent financial data, but the primary focus is on the deal.
The reasoning behind my format is that a self storage facility is not a business that requires many employees, vast amounts of inventory, or major amounts of machinery to manufacture, distribute, or sell a product. With self storage, the emphasis is on the care of a single asset, and the plan is a representation of my ideas for the efficient and effective management of the facility. I'm not downplaying my ability as a borrower, but in commercial real estate, the lender tends to look more to the performance of the asset than the borrower.
Below is a sample outline of a loan proposal and business plan. A good plan is professional, grammatically correct, free from spelling errors, logically organized, and most importantly, thorough. We will discuss these elements in the pages that follow.
1. Summary Page
a. Borrower name and the entity that will hold title to the facility
b. Property Legal Description
c. Purpose of the loan
d. Loan amount and terms requested
e. Loan Ratio, or Loan To Value (LTV) requested
f. Collateral and source(s) of repayment
g. Financial Summary
2. Market Summary and Analysis
a. Area map including facility, and photos of the facility
b. Demographics: Population, growth, employment, & income
c. Market Trends
3. Neighborhood Analysis
a. Location Description in relation to customer base
b. Market position
4. Property Description
a. Site plan and analysis
b. Aerial and or Satellite Photo (GoogleEarth.com)
c. Property Photos
d. Property Description and Rent Roll
e. Improvement plans
f. Management Summary
g. Marketing Plan
5. Financial Data
a. 3-year historical financial performance (if possible)
b. 3-year projection of operations
c. Basis for these assumptions
d. Source and use of Funds requested
6. Borrower data
a. Ownership structure and Entity
b. Background and experience of principal
c. Personal Financial Statement of borrower
a. Building and site plans
c. Sample Lease
I prefer to copy the package on 3-ring paper, and include in a binder with tabs for reference. Any one of the large office supply stores can assist you with this document at minimal cost. Remember, our goal is to have our loan proposal moved to the top of the heap when all the loans are proposed at the monthly loan committee meeting, and ultimately, given preferential consideration for being so professional and complete. Make it generic in nature, but include a formal cover to the bank and lender you are making the request to. There have been a few occasions where the lender wasn't able to fund the loan for some reason, in which case I would retrieve the package and forward it to another bank to start the process over.
In summary, when I have taken the time to prepare a thorough business plan and loan request, it has been given the attention and priority it deserves. And subsequently, I have had a great deal of success in getting my deals funded, and growing my business in ways others have failed.