Lenders and investors need to see the potential in a business and the credibility of those presenting before they invest in an idea, just like you would do thorough research before buying a house or a car. This is what makes business plans extremely useful and critical to raise loans and investments. Even a small mistake in the business plan can cost you your potential investments.
Lenders such as banks and investors look for specific information in your business plan. Here are some possible reasons that could damage the success of your business plan by repelling potential investors or lenders. We are going to look at some of the top reasons why your bank or investor has refused to fund.
A Great Idea but No Commercial Viability
Not all great ideas are commercially viable!
People usually have great ideas but they often fail to align their insights with market trends and demands. This is the reason why investors reject such ideas that fail to establish a clear representation of target consumers and product/service validation.
A proper business plan is devised through extensive market research, an absence of which results in the inclusion of out-dated and incorrect market information that can discredit the reliability of the entrepreneur in no time. Lack of research clearly shows that the entrepreneur is not successful in aligning the business assumptions with facts. Having a unique idea is a plus point for a business; however, it must not distract a person from the fact that many successful ideas are not based on unique insights but common sense.
Entrepreneurs, in an effort to come up with entirely new ideas, often fail to see the downsides of implementing them and the time and money needed to execute those ideas. They often don’t perform idea validation activities to authenticate their ideas before going to an investor, which results in failure of the entire plan. Adopting a systematic approach to the business plan writing process can help to overcome this problem.
Less Compelling Business Strategies – Poor presentation
Coming up with an idea is one thing and presenting it to the investors is entirely another!
A professionally crafted business plan is the one that helps the entrepreneur to pinpoint the best possible strategies for their business and gives out a notion that the entrepreneur is serious about executing those strategies and competing in the market. However, some new market entrants might make the mistake of not clearly presenting their strategies and potential outcomes to the investors, hence, lowering their chances of getting the much-needed funding to support the business concept.
There is no use of a great idea if you don’t clearly present them on your business plan. People often forget to include and highlight the insights in which the investors are most interested. They fail to establish a clear understanding of the mutual benefits that the business would bring to both parties.
Over-Hype or “Too Much” Information
Entrepreneurs often mistake business plan for a doctoral thesis and include tons of information in it, such an exhaustive reading can easily divert the focus of the investors from the main idea. Sugarcoating everything is not a good idea if you are looking for financial support for your business startup.
The problem with an over-hyped business plan is that it often fails to back up the wordy claims presented by the entrepreneur. Investors are more interested in the financial plan, the market research, business strategy, and the feasibility of the overall idea than the unnecessary details presented in a haphazard manner.
Sometimes, people make the mistake of writing too many technical details in their business plans, which most of the investors are not able to understand completely. The same is true for a plan that is too vague to understand. People often fail to realize that too much or too little information gives an overall bad impression on potential investors and might make them turn down the business proposal.
Most of the investors, who are well-prepared and know the industry well, always check the assumptions and facts presented in the plan against industry and market data. This is where vague assumptions damage the chance of getting an investment.
Making everything seem “all good” can raise suspicions and concerns regarding the credibility of the business proposal. This happens when the entrepreneurs don’t know how to integrate the risks in their business plans with a set of contingency plans to counter those risks. A business plan that lacks transparency fails to catch the eye of good investors.
Using Business Plan Templates
Most of the entrepreneurs, who prefer to write their business plan themselves, usually use business plan templates or software from the internet.
No doubt, there are numerous positive sides of business plan software and programs including the automatic generation of projected financial statements, categories, graphs, and tables. These programs also guide the writing process of the business plan. However, there are many things that make these programs less eligible and reliable to be dependent on.
- First of all, these software programs do not have human intellect and cannot gain insights from experiences.
- Moreover, the standardization of different software programs makes it very difficult to devise flexible plans. Entrepreneurs often rely solely on such templates because they are technically advanced, which limits their capability to customize their business plan according to the changing dynamics of the market, the perception and priorities of investors, and their targeted audience.
- It is also quite plausible to choose the wrong software, which doesn’t have the features required for a particular idea or the market. This might be due to the limited experience of the new entrants.
You can certainly use a template from the internet to understand the components of a business plan. However, you must write your own business plan following a systematic process. Especially, when it comes to financial projections and forecasts it is not even easy to find the right spreadsheet to estimate revenues and expenses.
A freshly written business plan from scratch has a higher success rate than using templates.
Unrealistic and Unreliable Assumptions
While selling your idea with detailing and well-described information is a good idea, the addition of unrealistic details in the business plan might do more harm than good.
It’s good to convey the probable performance by explaining the sales forecast; however, some new entrepreneurs make the mistake of making a plan full of conjectures, which are not welcomed by creditors and investors. As a result, the entrepreneurs waste their time in revising their plans, again and again, to come up with an acceptable business plan.
Many entrepreneurs also make the mistake of focusing too much on “profits” and fail to recognize the value of cash flow. If the core purpose of a business plan is to raise funding for your business, potential lenders such as banks and investors give a significant weightage to cashflows. Cashflows give comfort about the re-payment of debt or the availability of sufficient cash to pay dividends. A poorly prepared cash flow statement can make-or-break the whole financing plan.
A Business without Competition!
People might think that portraying everything well and good is the key to gain funding; however, this is not the case with business investors who are extremely careful regarding what kind of business they choose.
The statements like “Our business has no competition” might seem amazing to a person with a little knowledge of business, but this very statement could make the investors frown upon your market research and knowledge. This kind of thinking might act as one of the reasons behind the lack of strategies to combat the competition in your business plan. Generally, products and services do have alternatives. Even if you couldn’t think of direct competition for your business, there must be many organizations and enterprises that act as indirect business rivals.
Overflow and Improper Order of Priorities
An overflow of priorities gives rise to inconsistencies in the overall plan. The resulting opposing strategies might confuse the investors regarding the operational plan of the business and its future.
People often mistakenly use inaccurate terminologies while structuring their priority lists or the overall plan. It might not be an easy task to come up with a concise and strategic priority list during the planning phase; however, it can considerably increase the chances of gaining equity funds and desired investments.
Cognitive Bias flowing through Business Plan
One of the key issues in business plan writing is cognitive bias!
Sometimes, being too close to an idea or a project clouds the judgment. As a result, people often start writing their plan using their hearts instead of their heads, which give out a notion of unprofessional behavior and lesser credibility.
Four different types of cognitive biases which entrepreneurs should avoid:
- Optimism Bias – Being too inspired and over-optimistic about your business idea.
- Planning Fallacy: Thinking you can do it faster than others
- Sunk-Cost Fallacy: Considering the sunk cost as an achievement.
- Confirmation Bias: All signs point to Yes.
Portraying the business as a potential success is no doubt important in a business plan/proposal; however, the approach towards the plan must be objective and tied to the facts instead of embellishments. If you need to hire someone, go ahead and hire a professional business plan writer or ask for help with financial forecasts and projections.
All in all, there are many things that might seem negligible but they can bring down an entire plan for a new business. People often fail to realize that planning is the most crucial phase of any project and it needs time as well as money. At the end of the day, it is your plan that is going to save you from the hassle of finding the right kind of investment for your business. Any uncertainty or ambiguity in your business plan, arising from the mistakes mentioned earlier, can reduce your chances of raising funds.
New to Business Plans? Start here from learning the essentials of a business plan.
Maroof HS CPA Professional Corporation is a CPA firm providing services in Canada including professional business plan writing, helping with market research, and preparation of financial forecasts and projections. We do write business plans for banks, investor presentations, as well as business plans for immigration. Discuss your business plan needs with us and find out how can we help you in raising financing for your project. Contact us.