Obtaining finance

Another main purpose of a business plan, as well as minimising risk, is to obtain finance. Lenders and investors usually want to see a plan before they provide money, because it shows that you have thought through the idea and the numbers rather than relying on guesswork.

Who may ask to see a plan

Several outsiders may ask for a plan:

• a bank considering a loan
• venture capitalists deciding whether to invest in the business
• crowdfunding investors deciding whether to pledge money
• suppliers being asked for trade credit, which means paying for goods after they are delivered

What gives them confidence

Financial information such as cash-flow forecasts and profit forecasts gives a lender evidence that the money can be repaid. These forecasts turn the idea into figures that a lender can check. Market research in the plan can show that customers exist and that the business idea is sound.

For example, Asha plans a mobile bicycle repair service and asks her bank for £12,000. Her plan includes a survey of 150 local cyclists who say they would use a repair van, plus a cash-flow forecast showing that the loan repayments can be met each month. This gives the bank more confidence than a vague promise that "lots of people cycle".

Banks prefer lower-risk businesses. A well-prepared plan can reduce the risk in the bank's eyes, making a loan more likely and possibly available on better terms, such as a lower interest rate. It reduces perceived risk; it does not remove risk or guarantee that a loan will be approved.

The plan also gives information to outsiders other than lenders. A supplier deciding whether to offer trade credit may look at the plan's sales and cash-flow forecasts to judge whether the business will have cash to pay later.