Business Loans: Be Realistic About Your Business

Optimism is a quality that’s admirable in an entrepreneur, but if you’re too optimistic, your banker may get the sense that you don’t understand the risks inherent to your business.

Bankers undoubtedly understand that there’s no business venture with zero risk, so address potential risks within your business plan or during an interview. If you’re not up front about these issues, lenders may not feel confident that you have any contingency plans in place to deal with unforeseen circumstances or major risks.

Remember that bankers will definitely be realistic about their chances for recovering their loan if your business begins to fail, so you should also acknowledge and consider these possibilities.

According to SCORE, a realistic business plan should accurately reflect your personal abilities, recognize that industry and market changes require flexibility, and that you’re not overly optimistic about the business assumptions you make.

Make sure that your business plan is reasonable, and is appropriately scaled to the funding you expect. If your “reach exceeds your grasp,” it may be wise to confine your business operations to a certain region or sub-segment of your market and then grow your business later after you’ve generated significant cash flow.

Game Plan

Review your business marketing plan to make sure it’s realistic and makes conservative assumptions.
Carefully consider all the risks that could impact your business and make sure your business plan reflects them.
Consider consulting with a knowledgeable source like a SCORE mentor for another point of view on whether your plan reflects an appropriate mix of optimism and realism.
Be ready to explain how you’ll respond to potential future developments. You’ll need to show how you’ll handle any failures, of course, but also how you’ll handle success – a quality that shows you can effectively grow your business.
Conduct industry and market research so you can demonstrate a realistic view of the demographics and purchasing habits of your target market, potential pricing pressures, possible supplier shortfalls, and more.
Make sure you present detailed and verifiable claims. Merely promising to “deliver great products at low prices” shows a lack of detailed planning and poor strategic management skills.