When Developing A Business Plan Makes Sense

by Lou DiToro   

A business plan is a proven way of generating capital for a new business venture. But a well-written business plan can be expensive to develop, especially if you're trying to secure funding from venture capitalists and angel investors. That's money you could use to launch your new business. So you need to be sure you need a business plan before the writing starts. How do you know if you need one? It all depends on the type of business you're starting.

If you're starting an income substitution business, you may not need to develop a business plan to secure funding. These businesses are designed to replace the income lost when a person leaves a company. They usually don't require much cash to get off the ground. If you're planning on creating a fast-growth business, however, like a technology start-up, you'll need a well-written business plan. These businesses take a great deal of cash to launch and a sound business plan is an ideal tool for raising that capital.

Keeping Afloat Financially

Income substitution businesses aren't designed for rapid and fast growth, but for keeping oneself and one's family afloat financially. People often start this type of business after leaving a company or are being let go. Like any business venture, these businesses are profitable if run well. A consulting business is a good example of an income substitution business. Businesses need consultants. They can provide the experience and expertise in an area that firms need but often lack.

The key to a consultant's success is billable hours. The more projects a consultant completes, the higher his or her billable hours. When a project is done, the consultant moves on to another one. Sometimes, three or four consultants with complementary skills form a consultancy and market themselves as a firm. Other times, consultancies develop a proprietary product and the business changes forms. But by and large, these entities remain consultancies.

Consultancies Need Less Cash

Becoming a consultant takes much less capital than creating a fast-growth business. Sometimes, all a consultant needs is a phone, a computer, a printer, a list of contacts, and his or her expertise. Many consultants work from home to keep overhead low. Unfortunately, it's unusual to grown these types of businesses to go public. So they don't attract venture capitalists and angel investors.

While it helps to create a business plan for these income substitution businesses, it's not critical. Other ways exist to raise capital for them: You could approach a relative or parent for the money. You could ask a Good Samaritan to contribute. Or, you could take out a personal loan from a bank, secured by an asset. Each of these financial sources can provide enough money to start this type of business.

Fast-Growth Businesses Need A Plan

If you're founding a fast-growth business, on the other hand, you'll need a good business plan. These businesses need way more money than a friend or a relative can customarily provide, and the chances of finding a Good Samaritan that will lend you money based on an idea isn't likely. Getting a personal loan from a financial institution for this type of business isn't easy either. This is when a business plan helps.

Technology start-ups are a good example of a fast-growth business that needs a business plan. The term start-up describes a private company in the early stages of maturation. Usually, it's in its infancy. Start-ups are often the progenies of engineers or software developers that have a great idea for creating a new product or a much-needed service. If the product or service finds a market, the business takes off.

Start-ups Attract Investors

Start-ups attract venture capitalists and angel investors, if they see them as fast-growth opportunities. Investors want a growing company that can quickly attain a commanding position in a huge market. Ideally, they want a company that can go public in 3 to 6 years. They can then exchange their stock for cash and bow out. Fast growth is at the heart of an investor's business model.

Venture capitalists and angel investors almost always want to see a business plan before investing. It provides vital information they need to assess the company's chances, like how big the target market is and how the company expects to tap it. A good business plan also shows investors that the founder did his or her homework and is well acquainted with the industry. In other words, a business plan provides all the key information investors want to see before committing money to a project.

Conclusion

Business plans aren't required to start a business. Many great companies started out without one. But if you're creating a fast-growth business, you'll need financing to launch it. Since investors expect to see a well written business plan, it makes sense to invest in a good one by using a consultant to write it. A good business plan tells investors not only how quickly they'll get their money back, but also how much they'll profit from the investment. Those are hot buttons for every investor.