Connection between business models and obtaining commercial loans
I have written about business models in previous articles submitted to IE Business Daily. The reason is that well-crafted business models are so important in influencing bankers and lenders to loan money to small, privately owned businesses. A well thought business model will allow a company to stay in business over a long period of time. A lender’s worst nightmare is extending a 5 year term loan to company that goes out of business before the five year period!
For purpose of this article I will be using business models and business plans synonymously. Every CEO knows you need a good business plan but they are hard to write and they take a long time to complete. For me a business model is like a “mini business plan.” A business model addresses the same topics found in a plan just in less detail. Thus, they are easier and faster to write.
A business model is company’s written strategy for how it will create, deliver and sustain value for its customers. Specifically, a business model outlines the factors on how a company plans on beating out its competitors. Not all business models are created equal. The better the quality and the execution of the model, the greater likelihood a company will stay in business, which as was stated earlier is what lenders want, (and what you should want).
Anticipating your question of “Okay, how do I write a business model, Loan Doctor?” Here is my response. My “how to” is based on a template created by authors Bruce Barringer and Duane Ireland in their book “Entrepreneurship.”
Per Barringer & Ireland an effective business model should have four sections. I believe each section should be no more than one page per section, thus if you are a good student of your industry, your competitors and your business, your entire written business model should not exceed 4 pages. You can provide a copy of your model with pride to your perspective lenders.
These are the four sections of a good business model and a brief description of the required content for each section.
Core Strategy refers to how you plan to compete, vis-à-vis your competitors. Included in this section is why you’re in business (mission statement), who you intend to sell to (target market), what unique value you will bring to the table (value proposition). and what products or services you will provide in what geographic locations.
Resources refers to all the inputs you have or will need to produce, sell, distribute and service your product or service offerings. Included in this section is what special expertise you have or will need to obtain and what key assets you will need. These key assets could be physical (building, special inventory, etc.), financial, intellectual property, or human capital (if in the form of key managers or employees).
Financial refers to how your company will make money. Included in this section will be how many revenue streams you plan on having, what your pricing strategies are, what your cost structures are and what amount of financing you will need to implement.
Operations refers to your operating strategies. Included in this section will be who will produce your product or service (in-house or sub out), what distribution channels will you use (stores, on line, etc.), and who will be your key partners (suppliers, strategic alliances, etc.).
Trust me it seems like a lot, but if you list the info in bullet form, brief sentences you can create your written model in four pages. It should take no more than hour.
Are you willing to invest 60 minutes of your time to engage in an activity that will increase the chances of you obtaining the financing your business needs?
Let’s get busy!