Business Plan or Feasibility Study: Which Does Your Project Need?

Business plans and feasibility studies cover some of the same subjects, but they serve different purposes. Choosing the right document depends on the loan program, the size and complexity of the project and what the lender needs to make its credit decision.

What a business plan does

A business plan explains how a company intends to operate and succeed. It normally describes the business, its products or services, target market, competition, management team, operating strategy and financial projections.

For an established company, the plan may focus on an expansion, acquisition or new location. For a startup, it must also explain how the business will attract customers, establish operations and progress toward profitability.

A good business plan should answer practical questions:

• What is the company selling?

• Who are its customers?

• Why will they choose this business?

• How will the company operate?

• Who will manage it?

• How much capital is required?

• Can projected cash flow support the proposed debt?

For SBA loans, a business plan is generally expected, particularly for startups, acquisitions, expansions and other transactions in which the lender cannot rely solely on the company’s historical performance. The exact requirements vary by lender and transaction, but the business plan is usually one of the principal documents used to understand the borrower and evaluate the proposed loan.

How a feasibility study is different

A feasibility study is generally more analytical and independent. Its purpose is not simply to describe management’s plan, but to evaluate whether the proposed project is likely to be commercially and financially viable.

The analysis may examine market demand, competition, pricing, operating capacity, development costs, management experience, financial projections and major project risks. It should also evaluate whether the assumptions used in the projections are reasonable and supported by available evidence.

Feasibility studies are more common when a project is large, specialized, located in a less familiar market or dependent on assumptions that cannot be confirmed through the company’s operating history.

Who decides whether a feasibility study is needed?

Unlike a business plan, a feasibility study is often optional in an SBA transaction. When it is not specifically required by the loan program, the decision is generally left to the lender.

That decision may depend on the size and complexity of the project, the borrower’s experience, the amount of historical information available, the strength of the market evidence and the lender’s familiarity with the industry. It may also depend on how comfortable the lender is with the analysis presented in the borrower’s business plan.

This is one reason the quality of the business plan matters. A clear, well-supported plan can answer many of the lender’s initial questions and give the lender greater confidence in the borrower’s projections. A vague plan with unsupported assumptions may create additional questions and make an independent feasibility study more likely.

In some cases, both documents are useful. Management’s business plan explains what the company intends to do, while the feasibility study provides an independent evaluation of whether the plan is supported by market and financial evidence.

Before commissioning either document, the borrower should ask the lender what is required, whether an independent consultant must prepare the feasibility study and whether the lender has specific content requirements.