It is not unusual for an attendee in a workshop I present or class I teach to challenge the idea of planning, particularly the future
flow of money. They listen to the class, or part of it, then a hand goes up. One popular comment is: “My bank doesn’t require a business plan
for a loan up to $50,000, or $100,000 or $150,000, so I don’t need to do a business plan with a cash flow forecast.” I might respond, “Does the
lender want you to pledge something valuable as collateral?” Invariably, the bank wants the family residence to secure the loan. My question,
“How much do you like your home?”
When people buy a home, they and their lender, take time to study the availability of household income to pay back the mortgage.
(Perhaps some people did not study that as well as necessary.) Traditionally, circumstances were analyzed quite thoroughly for home purchases.
Once people build up equity in their home, they and some lenders seem very eager to “take money out of the house” for a business loan, a
new car, a new addition, etc. Equity is the difference between what the home is worth and any mortgages or lines of credit against it. Write
down a realistic appraisal value of the house and land; subtract the balance due on the mortgage and other loans or lines of credit on that
property to find the equity.
Consider any loan against your residence seriously. This is a time to stop and think. Loans for business purposes need to be paid back.
Simple concept, but sometimes people rush. The devil is in the details.
In some cases, the business owner will keep a current job and start a part-time business. They live a dual life until the business can
generate sufficient income to replace all or part of the full-time salary and benefits. This is difficult, but it can work for some people in
certain small businesses for a set duration of time. If taking on more debt (additional monthly payments), make sure salary or business income
will be sufficient to pay off this new obligation. Banks want to lend money and, over time, collect interest and receive back the principal.
They do not want to own your home or business real estate.
A bank may be doing you and their organization a favor by suggesting a loan on a house without a business plan. This is not wrong. It
can save time and expense on both sides. The interest rate may be better. Approval time may be quicker. Make a list of the pros and cons.
When a lender doesn’t require a business plan including cash flows to support a loan, the lender is not forcing a business owner to complete
forecasts. Nor does the borrower benefit from the lender as an experienced sounding board. The business owner needs to force themselves to
shoulder these important responsibilities.