Many entrepreneurs or first-time business owners wonder why is the bank asking me for a business plan if I have the collateral to back up the loan I am requesting?

Banks ask for collateral to protect the money they will lend you. This collateral may be in the form of an asset such as real estate, savings, commercial property etc.: however, the banks also want to make sure you will be able to succeed at your business. Their idea is to eventually get their money back. They charge you interests but at the end of the day, the bank doesn’t want to have to deal with lots of assets, properties etc. A good way to ensure or to at least increase your possibilities of success at your business, and for the bank to get their money back,  is to ask you for a business plan.

While you go through the process of writing a business plan, even if you hire someone to write it for you, you will have to gather all the information, get quotes, find about regulations and requirements, find about the competition and do some market research. As mentioned before, even if you don’t write it yourself, the fact that you have to get involved in gathering all of the information will give you a very good idea of where you are going, how much are your expenses and how much money you will need to start your business. Not to mention a thorough analysis of your competitors, determining who your ideal client is and how you are going to be able to reach those clients.

Making sure that you write a detailed business plan is very important for the bank to determine how committed you are to the project, how much do you know about your business, how motivated you are and how secure their investment in your project is going to be.

In conclusion, even if you have the assets and the collateral to secure a loan, banks will feel a lot more comfortable giving you a loan if you present a solid business plan.