Payback Analysis

When will your business be able to start paying back your business loans?

Brief Description

Your business plan must demonstrate that you will be able to make timely payments on your loan. If you are seeking investors, they will want to see how they will recoup their investment in a well laid out business plan exit strategy. The exit strategy of your business plan needs to include a narrative addressing these issues.

 

This Section of Your Business Plan Should Include:

For Loans:

  • State when the company will be able to start making loan payments
  • Refer to your financial statements, which must show the ability to make payments at the time indicated.

For Equity Investments:

  • A statement about how and when investors should expect to be able to sell their stock, or your exit strategy
  • Whether or not it’s included in the plan, be prepared to talk about the feasibility of your exit strategy.

In the section below we will go over your “Payback” scenario which often pertains to loans.

 

Important Considerations

For Loans

If you’re seeking a loan, you should understand the terms expected by the lender, even before preparing your financials. This can be learned through preliminary meetings, which are recommended in any case to start building rapport with your banker or lender. Some lending organizations might be content to accept no payments for 6 months. Others might accept interest only for the same period. Still others will want payments of principal and interest to begin immediately.

By knowing how your lenders work with clients, you can incorporate this information into your business plan financials. For example, if the lender agrees to no payments for the first six months, it will have an impact on the amount you will need to borrow.

In the end, your financial statements need to show that the business is expected to generate sufficient cash to make the required payments on time. Since your loan will likely be collateralized by your own personal assets, it will be essential to you that these forecasts prove to be accurate.

Many entrepreneurs who sign a personal guarantee don’t understand that the bank will be entitled to take every dollar that the business owner has—including personal funds—before the bank loses one dollar of its own money.

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