A business plan can improve your chances of being approved for a loan by helping to persuade lenders that your business is worth investing in and that you have the ability to repay the loan. Many lenders will ask that you include a business plan along with other documents when submitting your loan application.
When applying for a business loan, you want to highlight your abilities, justify the need for your business and define your financial needs. A well-thought-out business plan gives you the opportunity to do that.
Business plan sections and characteristics
A traditional business plan format is typically what lenders are looking for as part of your loan application. This comprehensive layout gives you space to provide detailed information about your business.
The executive summary is used to spark interest in your business. It may include high-level information about you, your products and services, your management team, employees, business location and financial details. Your mission statement can also be added here.
The company overview is an area to describe the strengths of your business. If you didn’t explain what problems your business will solve in the executive summary, do it here. Highlight any experts on your team and what gives you a competitive advantage. You can also include specific details about your business such as when it was founded, business entity type and history.
Products and services
Use this section to demonstrate the need for what you’re offering. Describe your products and services and explain how customers will benefit from having them. Explain any patents or copyrights here.
Here you can demonstrate that you’ve done your homework and showcase your understanding of your industry, current outlook, trends, target market and competitors. You can add details about your target market that include where you’ll find customers, ways you plan to market to them and how your products and services will be delivered to them.
Marketing and sales plan
If you didn’t cover marketing strategies in your market analysis section, you can devote an entire section to the topic. The main goal is to provide details on how you plan to attract your customers and build a client base. You can also explain the steps involved in the sale and delivery of your product or service.
The operational plan section covers the physical requirements of operating your business. Depending on your type of business, this may include location, facility requirements, equipment, vehicles, inventory needs and supplies. Production goals, timelines, quality control and customer service details may also be included.
This section illustrates how your business will be organized. You can list the management team, owners, board of directors and consultants with details about their experience and the role they will play at your company. This is also a good place to include an organizational chart.
This is where you explain the loan amount you want and how the funds will be used. You can add details about how the money will be spent. Also include your strategy for paying off the loan.
Financial statements can indicate the financial health of a business and also demonstrate to the lender that you have the ability to repay the loan. Include three to five years of actual or projected income statements, cash flow statements and balance sheets. For an existing business, consider also including an expense analysis and a break-even analysis. When using forecasted statements for a new business, explain your projections. Graphs and charts can be useful visual aids here.
Finally, if necessary, supporting information and documents can be added in an appendix section. This may include letters of reference, product pictures, licenses, permits, contracts and other legal documents.
What lenders look for in your business plan
A lender will typically evaluate your loan application based on five C’s — or characteristics — of credit: character, capacity, capital, conditions and collateral. While it won’t contain everything the lender needs to complete its assessment, your business plan can highlight your strengths in each of these areas.
A lender will assess your character by reviewing your education, business experience and credit history. This assessment may also be extended to board members and your management team. Highlights of your strengths can be worked into the following sections of your business plan:
Capacity centers on your ability to repay the loan. Lenders will be looking at the revenue you plan to generate, your expenses, cash flow and your loan payment plan. This information can be included in the following sections:
Capital is the amount of money you have invested in your business. Lenders can use it to judge your financial commitment to the business. You can use any of the following sections to highlight your financial commitment:
Conditions refers to the purpose and market for your products and services. Lenders will be looking for information such as product demand, competition and industry trends. Information for this can be included in the following sections:
Products and services.
Marketing and sales plan.
Collateral is an asset pledged to a lender to guarantee the repayment of a loan. This can be equipment, inventory, vehicles or something else of value. Use the following sections to include information on assets:
Free resources for writing a business plan
The Small Business Administration, or SBA, offers a free self-paced course on writing a business plan. In addition, SCORE, a nonprofit organization and resource partner of the SBA, offers free assistance that includes a step-by-step downloadable template to help startups create a business plan, and mentors who can review and refine your plan virtually or in person.
Are Small-Business Loans Installment or Revolving?
A small-business loan provides funds to purchase supplies, expand your business and more. This type of funding can be either installment or revolving. Reviewing the credit terms of your loan offer will help you determine whether you’re being offered an installment loan or revolving credit.
Both types of loans can be found in the Small Business Administration, or SBA, loan program and at banks, credit unions and online lenders. While each can provide much-needed funding for your business, there are some key differences to keep in mind.
Installment loans vs. revolving credit
Installment loans provide a lump sum of money
An installment loan is a credit agreement where the borrower receives a specific amount of money at one time and then repays the lender a set amount at regular intervals over a fixed period of time. Typically, each payment includes a portion for interest and another amount to pay down the principal balance.
Business term loan is another common name for this type of loan. After the loan is paid off, the borrower typically must apply for a new loan if additional funds are needed.
Revolving credit provides flexible funds
A revolving loan is a credit agreement where the borrower can withdraw money as needed up to a preset limit and then repays the lender a portion of the balance at regular intervals. Each payment is based on the current balance, interest charges and applicable fees, if any. You pay interest only on the funds that you use — not the maximum limit.
A business line of credit is a common type of revolving credit. Revolving credit gives the borrower flexibility in determining when to withdraw money and how much. As long as the credit balance remains within the preset limit and you continue to make timely payments, you can continue to draw from the line again and again.
Differences between installment loans and revolving credit
The terms of a loan can vary depending on the type of loan, lender and your business’s credentials. Your loan may be a unique combination of terms. However, the following are some common differences between installment and revolving loan programs.
Withdraw as needed.
Minimum amount based on balance and interest with option to pay more.
Based on loan amount.
Based on current balance, not maximum loan limit.
Ability to renew
Not renewable, typically.
When to use an installment loan
Set loan amount is needed
If you’re confident in the loan amount you need, then an installment loan may be the right fit, especially if you need the money in a lump sum. For example, if you’re using the funds to make a one-time purchase, you’ll likely want an installment loan.
Long-term financing needs
Some term loans can offer you more time for repayment when compared with revolving credit. When you stretch your payments out over a longer period of time, it can mean a lower monthly payment. However, that trade-off typically means you’ll pay more in interest costs over the life of the loan.
Larger funding needs
If you’re looking to purchase property, equipment or other large-ticket items, there are a number of installment loans that can be used for this purpose. Revolving credit limits are often less than term loan maximums.
Preference for predictable payments
With a set monthly payment amount, it can be easier to budget for an installment loan compared with a revolving loan, where the payment varies depending on how much of the credit line you use.
When to use a revolving loan
Short-term financing needs
Revolving credit can be good to handle short-term cash shortages or to cover unexpected expenses. Some businesses use lines of credit as an emergency fund of sorts since they’ll pay interest only on the funds they use.
Fluctuations in cash flow
Businesses that experience major fluctuations in their cash flows may benefit from revolving credit. For example, seasonal businesses that don’t have consistent revenue throughout the year can use lines of credit to cover operational costs during their slow season.
Preference for flexible loan amount and payments
If you don’t know exactly how much money you need, then revolving credit will give you the option to qualify for a maximum amount but only withdraw funds as you need them. This way, you’ll pay interest only on the current amount owed.
Compare small-business loans
To see and compare loan options, check out NerdWallet’s list of best small-business loans. Our recommendations are based on the lender’s market scope and track record and on the needs of business owners, as well as rates and other factors, so you can make the right financing decision.
Advantages and Disadvantages of a Business Bank Loan
According to the Federal Reserve’s 2021 Small Business Credit Survey, banks remain the most common source of credit for small businesses — compared with options such as online lenders, community development financial institutions or credit unions.
You can use a business bank loan for a variety of purposes: working capital, real estate acquisition, equipment purchase or business expansion. To qualify for one of these small-business loans, however, you’ll likely need excellent credit and several years in business.
Before applying for a business loan from a bank, consider the following advantages and disadvantages.
Advantages of business bank loans
Flexible use of funds
Banks offer a range of different business loan products, including term loans, business lines of credit, equipment financing and commercial real estate loans, among other options. Unless you opt for a product that has a specific use case, like a business auto loan, for example, you can generally use a bank loan in a variety of ways to grow and expand your business.
When you submit your loan application, the bank may ask you to identify a purpose for the financing to evaluate the risk of lending to your business. Once you’re approved, however, the bank is unlikely to interfere if you change your intentions, as long as you make your payments. This flexibility is perhaps one of the biggest advantages when comparing debt versus equity financing.
Large loan amounts and competitive repayment terms
Bank loans are often available in amounts up to $1 million or more. Many online lenders, on the other hand, only offer financing in smaller amounts. Popular online lenders OnDeck and BlueVine, for example, both have maximum loan limits of $250,000.
Business loans from banks also tend to have long terms, up to 25 years in some cases. These loans usually have monthly repayment schedules, as opposed to daily or weekly repayments.
In comparison, online business loans typically have shorter repayment terms, ranging from a few months to a few years. Many of these loans require daily or weekly repayments.
Low interest rates
Banks typically offer small-business loans with the lowest interest rates. According to the most recent data from the Federal Reserve, the average business loan interest rates at banks range from 3.19% to 6.78%.
Although some online lenders can offer competitive rates, you’ll find that their products are generally more expensive than bank loans, with rates that range from 7% to 99%.
The interest rates you receive on a bank loan, or any small-business loan, however, can vary based on a number of factors, such as loan type, amount borrowed and your business’s qualifications, as well as any collateral you provide to back the loan. In general, the stronger your qualifications and the more collateral you can offer, the better rates you’ll be able to receive.
Relationship with a bank lender
Many banks provide ongoing support for their lending customers, such as business credit score tracking or a dedicated relationship manager to work with your business. Most banks also offer other types of financial products, such as business checking accounts, business credit cards and merchant services, if you prefer to use one institution for your financial needs.
Although some alternative lenders offer additional support and services, the Federal Reserve’s 2021 Small Business Credit Survey reports that businesses that receive financing are more satisfied with their experience with small banks (74%) and large banks (60%) compared with online lenders (25%).
Disadvantages of business bank loans
Intensive application process and slow to fund
To apply for a small-business loan from a bank, you’ll need to provide detailed paperwork that may include, but is not limited to, business and personal tax returns, business financial statements, a loan purpose statement, business organization documentation, a personal financial statement form and collateral information. You may have to visit a bank branch and work with a lending representative to complete and submit an application — although some banks offer online applications for certain business loan products.
The entire process, from application to funding, can take anywhere from several days to a few weeks, or even longer, depending on the type of loan and the bank. Some banks will also require you to open a business checking account with them before you can receive funds.
In comparison, alternative lenders typically have streamlined, online application processes that require minimal documentation. Many of these lenders also offer fast business loans — in some cases, funding applications within 24 hours.
Strict eligibility requirements
To qualify for a business loan from a bank, you’ll generally need strong personal credit (often a FICO score of over 700), several years in business and a track record of solid business revenue. Bank of America, for example, requires a minimum annual revenue of $100,000 for unsecured term loans and a minimum annual revenue of $250,000 for secured term loans.
Depending on the bank and the loan type, you may need to provide collateral, such as real estate or equipment, to secure your financing. Most banks will also require you to sign a personal guarantee that holds you personally responsible for the debt in the event that your business can’t pay.
Online lenders, on the other hand, have more flexible qualifications and some will work with startups or businesses with bad credit. To qualify for a business line of credit with Fundbox, for example, you only need six months in business, a credit score of 600 or higher and at least $100,000 in annual revenue.
Although online lenders may still require a personal guarantee, they’re less likely than banks to require physical collateral.
Find and compare small-business loans
Still trying to determine the right way to finance your business? Check out NerdWallet’s list of the best small-business loans for business owners.
Our recommendations are based on the market scope and track record of lenders, the needs of business owners, and an analysis of rates and other factors, so you can make the right financing decision.
Fidelity Bonds: What They Are, How to Get One
Fidelity bonds are insurance policies that protect a business’s finances in case an employee steals from the business or commits fraud. Fidelity bonds are also known as employee dishonesty insurance.
You can buy a fidelity bond on its own or as part of a commercial crime insurance policy. Consider purchasing this coverage if your employees routinely handle money or valuable assets that belong to your business or your customers.
What are fidelity bonds?
Fidelity bonds are a type of business insurance that protects your business finances if an employee steals money or property from your company or customers.
This coverage can pay out to make your business whole if an employee or group of employees commits theft on the job. It goes by a few different names, including “employee dishonesty insurance,” “fidelity bond” and “employee dishonesty bond.”
Despite the name, fidelity bonds are insurance policies, not bonds. Historically, fidelity bonds were similar to surety bonds, which are agreements among the business owner, their client and a third party promising that work will be completed. Today, fidelity bonds are structured like insurance policies. Some companies still use the term “fidelity bond,” while others use “employee dishonesty insurance.”
Does your business need a fidelity bond?
Fidelity bonds are important for businesses where lots of employees have access to your business finances or customers’ property. Consider purchasing this coverage in the following instances:
If your employees have access to your business finances: Nonprofits, medical offices, professional offices and other kinds of businesses where employees make financial transactions are all at risk of employee theft.
If your employees have access to customers’ money or assets: If your employees regularly enter customers’ homes or businesses, a fidelity bond can set you apart from your competitors because customers know their assets are protected. This may be important for janitorial and cleaning businesses, HVAC businesses, plumbing businesses and other in-home service providers.
If you need this type of protection, look for business service bonds or third-party fidelity bonds, which specifically protect a business’s customers from losses due to theft.
If you work as a contractor or consultant: Clients may request that you buy a fidelity bond before beginning work with them. In this case, you’ll also want a business service bond.
If you work in the financial services industry: You may need a specialized type of fidelity bond known as a financial institution bond, which protects financial institutions. If you’re a pension plan trustee, you’re also required by law to have an ERISA bond, which protects pension plan participants and their beneficiaries.
How to get a fidelity bond
You can get a fidelity bond on its own or as part of a commercial crime insurance policy. If your business faces risks like forgery, computer fraud, extortion and counterfeiting, opting for a broader commercial crime policy may make sense.
NerdWallet recommends getting business insurance quotes from multiple companies so you can compare coverage details, coverage limits and premium costs before choosing a policy. Start your search for fidelity bonds with these companies:
If you need a business service bond to protect customer assets: Nationwide sells business service bonds, which cover your customers’ losses if one of your employees commits theft or fraud on their premises, as well as employee dishonesty bonds and ERISA bonds. Read NerdWallet’s review of Nationwide business insurance.
If your primary concern is your company’s assets:
You can also look into bonding companies, which specialize in products like surety and fidelity bonds. Merchants Bonding Company, for instance, was one of the 10 largest writers of fidelity and surety bonds by premium values in the first half of 2021, according to the Surety & Fidelity Association of America
How much do fidelity bonds cost?
The cost of a fidelity bond depends on the size of the bond, which is the most the insurance company will pay out to cover a loss.
According to BondExchange, a wholesale insurance marketplace that helps insurance agents find policies for their customers, fidelity bonds insuring five or fewer employees can cost:
$100 per year for a $5,000 bond.
$167 per year for a $20,000 bond.
$257 per year for a $50,000 bond.
$359 per year for a $100,000 bond