June 16, 2023 By Max Freedman

Small business owners generally need some type of plan to help focus strategy, assign and track responsibilities, manage money and more. A lengthy formal document known as a business plan can arrange all your ideas on this front into concrete action plans.

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However, creating a formal business plan can be an overwhelming and time-consuming document to put together, especially when you’re working hard to grow your business. But it’s generally worth it, as some financial institutions require business plans as part of loan applications.

Business plans and small business loans often go hand in hand. That’s because all business plans include a financial plan that can help you determine when you might need funding. And then, with your business plan all ready to go, you might be more likely to get approved for borrower-friendly funding. The best funding sources often come with such low interest rates and long repayment terms that their repayment burden feels minimal.

Of course, this all might have you asking, “Do I need a business plan to get a small business loan?” Find out more below.

What is a business plan?

A business plan is a document that lays out a roadmap for all your most important operations. That includes marketing, sales, distribution, production, and objectives. A great business plan also includes robust competitor and break-even analyses to prove that your business is more likely to succeed than fail. The more persuasive your plan, the more likely any lenders to whom you show it will fund your business.

Do I need a business plan to get a small business loan?

The answer to this question is often, but not always, yes – as it tends to vary by lender. For example, SmartBiz® doesn’t require applicants to submit business plans, which means you can get SBA 7(a) loans and bank term loans without the time and effort that goes into creating a business plan. It is important to note that even when lenders do require business plans, these documents aren’t an automatic path to approval.

Traditional bank requirements vs. alternative lenders

If you are approaching a traditional bank for a loan for a small business, your loan officer may require a business plan to look more favorably on your application. You may be required to provide a business plan whether you’re applying for SBA loans or traditional bank loans. 

However, if you’re using an alternative small business funding lender, you don’t need to present this document at all. That’s just one way in which alternative online lenders like SmartBiz are more flexible. These lenders typically provide online applications which can show loan options that you may qualify for. You’ll also have easy access to customer service for any assistance you need, which isn’t always the case with traditional banks.

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Documents required by traditional banks

Traditional banks may require business plans alongside the following documents:

  • Credit report. Typically, you must provide a credit report showing a personal credit score above 660.
  • Proof of time in business. To qualify for a bank loan, your company must have at least two years in business. Your articles of incorporation or organization can help you prove this time in business.
  • Financial ability to repay the loan. You must also demonstrate sufficient cash flow to repay the loan. Financial statements such as balance sheets and income statements can help you show that your business finances meet this requirement.
  • Proof of resident status. Small business borrowers must provide proof of U.S. citizenship or permanent residency. All other residency statuses disqualify you from taking out bank loans.
  • Financial record clear of difficulties. Another requirement is having no bankruptcies or foreclosures in the last three years, as well as no tax liens. Your credit report may be your best bet for proving your clean record.

Documents required by alternative lenders

SmartBiz CEO Evan Singer was recently interviewed about the requirements to get an SBA loan through the SmartBiz website. He said, “SmartBiz doesn’t require a business plan or projections, which is one of the ways it differs from many other SBA lenders.”

What are the documents required by SmartBiz to secure funding? You’ll need to collect a variety of personal and business information including those below.

  • Personal and business tax returns. You must submit your last three years’ of personal and business tax returns with your application. These documents can help lenders understand your income – and, to an extent, expenses – at surface level.
  • Personal financial statements. All people who own at least 20 percent of your company must provide personal financial statements. These documents can help lenders determine whether or not there are financially responsible people behind your business.
  • Profit and loss statement. Also known as an income statement, this document shows all your revenue and expenses during a period. It’s an easy way for lenders to determine your company’s financial performance.
  • Balance sheet. Your balance sheet provides an especially clear financial overview of your business. It covers one point in time rather than a broad period. It operates on the following equation: assets = liabilities + equity.
  • Collateral. Alternative lenders may require a lien on your business assets when you apply for SBA 7(a) loans. This lien gives the lender temporary ownership over these assets, which can include your accounts receivable, inventory, equipment, and commercial real estate. This way, the lender can recoup their losses if you don’t repay. For SBA 7(a) commercial real estate loans, the property is the collateral. 
  • Miscellaneous additional documents. You may also need to show documents proving your company’s location and type of entity. Alongside these documents, you may need to include your articles of incorporation, business licenses, franchise agreements, and commercial leases. For SBA 7(a) loans, a completed SBA Form 413 is a must.

Why do you need a business plan?

Even though you don’t always need a business plan to get funding, there are many reasons to create one. These reasons include the following.

  • Easier to set and achieve goals. A business plan can help define a new business’s objectives. It can also define the programs you need to achieve those objectives. That’s a winning combination even if you’re not applying for loans.
  • Internal analysis. A business plan can be used to evaluate a new product line. It can also create a regular business review and course correction process. This can all come in handy whenever your company faces new demand or any pressing issues. 
  • Legal applications. A business plan can help define agreements between partners and set a value on a business for sale or legal purposes. It can help you avoid costly litigation or arbitration and more quickly reach an agreement that works for everyone.

To learn more about what a formal business plan should include, visit the Small Business Association website. Are you a small business owner seeking funding to expand your business? Visit the SmartBiz website today and find out if you’re qualified for an SBA loan in 5 minutes or less.*

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