Purely-online business enterprises need a business plan that clearly spells out the most important factor: the method that the company plans to use in order to monetize its online presence. Here at Biz Plan Company we have run into Internet entrepreneurs who have amazing ideas with regard to product, but when it comes down to explaining a realistic way to generate profits they draw a blank.

Online startup companies need business plans more desperately than their brick-and-mortar counterparts. Internet entrepreneurs are often asked about their business model, and when such questions come from potential sources of financing like venture capital firms, an accusative tone may be employed.

It has been more than two decades since the first online business models emerged, and since that time they have been pared down to a few more than a handful feasible and realistic ones. The business models listed below are not for Internet businesses that offer tangibles such as e-commerce fashion sites or that develop mobile apps. They are for entrepreneurs who need business plans for blogs, social networks, immersive online games, curation sites, consumer review sites, etc. Please note that these models can also be combined into a single business plan for greater impact.

Advertising

Financing sources should not have a hard time understanding this one since it is based on the old broadcast advertising business model, but entrepreneurs should specify if they are choosing networks like Google AdSense, or if they intend to sell online space.

Subscriptions

This is an early Internet business model that is easy to spell out in a business plan. Just like with advertising, subscriptions follow a traditional model that can be monetized on a daily, weekly, monthly, or annual basis.

Merchant

This is similar to e-commerce, except that the business owner may not have the goods at hand. A website can offer goods wholesale or retail, but the fulfillment and sometimes even the payment processing takes place elsewhere.

Information Provider

Consumers appreciate obtaining independent information about goods, services and business processes. This model requires a partnership with consumers and providers of good and services, and it is up to the business owner to establish trust. Revenue may be difficult to realize with this model by itself, and thus it may need to be combined with other(s) listed here.

Brokerage

Another traditional business model that has proven successful for many online entrepreneurs. At its most basic level, it consists of an online marketplace where buyers and sellers meet and the business owner collects a fee or commission.

Affiliate

This model can flow in two directions. Entrepreneurs can focus their efforts on driving sales to a site, or an online business can promote its own affiliate network to extend its business reach. This method can also be combined with any of the others listed above.

If you have questions about the best business model that applies to your online enterprise, please contact us for a free consultation. We will be happy to explain how we can write your business plan in detail so that your monetizing intentions are expressed clearly.

• There are approximately two billion active Internet users, and many of them choose smartphones as their preferred browsing platform.
• Along with entertainment and electronics, online sales of fashion apparel are the strongest.
• Cloud computing is making e-commerce easier, more accessible and more affordable for entrepreneurs.

Online shopping giants like Amazon and eBay are the clear winners of the e-commerce wars, but it is interesting to note that the traditional products offered by these two companies -books, movies and music- are no longer their strongest sellers. General merchandise items like fashion clothing and accessories are now a major part of their sales.

A business plan for an e-commerce fashion store is not like the typical information technology business plan. The choice of e-commerce platform is very important, and it is something that lenders and investors are paying attention to. Cloud-based solutions are preferred due to their low cost, but business owners should acquaint themselves with everything that their hosts offer in terms of uptime, bandwidth, security, and backup procedures. When possible, these factors should be included in the plan.

Many e-commerce fashion entrepreneurs requesting business plans are in California, and they cite their proximity to the major ports -like Long Beach and Alameda- as an advantage due to the shipping traffic from Asia, where many affordable fashion items are manufactured these days. For online fashion shop owners who are not based in California, it is vital to mention a relationship with a distributor in the business plan.

Franchising a business concept is essentially packaging an investment. This means that the franchise owner -or franchisor- becomes a seller who will have some control over the investor -the franchisee; something that will require abiding by the rules set by the Federal Trade Commission (FTC) and the Franchise Disclosure Document. This is not, however, the only way it can be structured; a business opportunity can be packaged in a way that the seller simply offers a document or a concept that involves no control over the brand or the operation of the business.

Another important considerations to make is that several states require registration of business opportunities and franchises, and some even require a bond to be obtained and filed with a state business agency. Satisfaction of these requirements, or at least the intention to fulfill them, must be included in the business plan.

Business opportunity enterprises are more common than people think. These include vending machine routes, distributorships, merchandising and concession businesses by keeping display racks of products in retail stores, etc. These can be quite profitable enterprises, but they sometimes require a considerable amount of work and a solid business plan to guarantee success. They may also need to work on establishing a business credit file.

Franchisees may have the benefit of the franchise owner’s business model, experience, brand, processes and more, but they are not always exempt from filing a business plan. They do have an advantage when it comes to industry and market research and forecasts; in fact, we have worked with franchisors who are very cooperative in this regard.

There is no single business plan concept for mobile apps; some entrepreneurs would like to be their own in-house developers while others seek to be third-party developers for hire. Some already have their apps approved and listed on the iTunes App Store or Google Play and are looking for marketing funds, while others have not yet begun developing but have the right ideas to distribute and monetize an app.

We are finding that quite a few would-be mobile app entrepreneurs have limited business backgrounds. Some have tried to model their own plans following an Information Technology business plan. Others have a very good grasp on app development but lack a solid business strategy.

The market for smartphone and tablet apps is definitely in place. The projected growth is very promising, and users are very interested in apps. The problem is that developers without a business strategy are not necessarily working or growing with the market. Sometimes they are jumping from one strategy to another, and one look at the Android Marketplace and the disparity in app pricing and features indicates that many developers are operating without a mobile business plan. Some don’t even bother to incorporate or develop a business credit profile.

In our experience, app developers are too eager to monetize apps on sales alone but fail to show lenders and investors key factors like realistic P&L projections, expenditures, side revenue from ad-supported sales, assets, marketing strategy, etc. Our mobile business plans cover all these factors and more, but more importantly we work with entrepreneurs in choosing the right business strategy, which is what investors and lenders really want to see.

Note: We are seeing an uptick in interest from entrepreneurs who intend to develop or market Windows Phone 8 apps. These clients, in turn, are reporting encouraging results with their plans.

Pooling together funds from several small investors for the financing of a business or project is not a novel idea. In the late 20^th century, fans of British progressive rock band Marillion pooled together funds to send the band on a concert tour of the United States. In recent years, crowd funding has been fueled by the Web 2.0 paradigm and made easier by the online payments industry.

Many crowd funding projects are of the creative kind, such as the Robocop statue in Detroit -successfully funded by 2,718 backers on Kickstarter, who pledged $67,437. Another notable project on Kickstarter is the recently funded Ouya video game and entertainment all-in-one console, whereby more than 63,000 backers pledged $8.5 million.

Should Crowd Funding Projects Include Business Plans?

The advent of crowd funding portals is good news for entrepreneur, but the reality is that for every Robocop statue and Ouya Android console there are hundreds of thousands of crowd funding projects that never achieve their funding goals. In today’s difficult economic environment all methods of financing need to be considered and crow funding is no exception, but business hopefuls are rushing into it without proper planning.

Crowd funding, at this initial stage, is mostly attracting donors. Still, would-be financiers and investors are going online and looking at these projects and expressing their dismay at the sore lack of business plans. The Ouya business plan, or lack thereof, has sparked lively online debate over the viability of committing funds to projects that have no business plans to review. Commenting on Ouya, Dan Ackerman of CNET offered the following:

“[…] the main reason many of the projects on Kickstarter are on there is because they have no rational business plan, and therefore can’t attract traditional investors.”

Mr. Ackerman points to two other successful Kickstarter projects that earlier this year were not close to shipping. The business people behind these projects can’t be blamed; the lack of a business plan means would signal a lack of a shipping date.

Entrepreneurs who list their projects on crowd funding sites should remember that potential investors and financiers are also on those sites, and that they may be interested in some listings -but only if they have a business plan ready for review. The other factor to consider is: What happens if the funding goal is not met? What next? The logical step would be to look for investors or to apply for a business loan, but without a business plan they will not get too far.

There are two important factors that stand out in any business plan intended for review by lenders: proper incorporation and an established business credit profile. These two factors, unfortunately, are often ignored by entrepreneurs.

There is a certain legacy that has carried over from the dot-com bubble days: the false image of a start-up that obtains healthy amounts of venture capital funding or angel investing based on an idea scribbled in a bar napkin. In the way lenders look at business plans, the idea may be crucial, but the structure and support that surrounds the idea are even more important. A business entity with an established credit report that has been properly registered in the jurisdictions it aims to operate in is more attractive to lenders than just a business idea.

• Lawful formation of a business entity these days is as easy as visiting the web site of an online service like Corpnet and following the instructions therein. Depending on the entrepreneurial objectives and future accounting needs of the company, a business may be registered as a corporation, a partnership or a limited liability company (LLC).

• Establishing a credit profile can be accomplished at Dunn & Bradstreet, the premier credit bureau for American companies. This is a very important step for business financing, and if the company has already been operating for some time it is even more imperative to ensure that a credit profile is in place.

NOTE:

The 5 C’s of Business Lending

When you a apply for a business loan, the lender will examine the following five factors:

1. Capital – This is the combined amount of money and assets a business has available, and it also includes equity. Equity means the value of ownership interest in property. The lender calculates equity by determining the net difference of assets minus liabilities on a balance sheet.

For example, if Truck Co. A owns 4 trucks worth $100,000, but owes $150,000 for the same vehicles, then Truck Co. A would have negative equity. On the other hand, if Truck Co. B owns 4 trucks worth $100,000 and only owes $5,000, then Truck Co. B has positive equity. Of course, financial statements do not tell the lender the whole story. Therefore, the lender will also consider “practical capital” or “skin in the game”. “Skin in the game” means that the business owner will use his or her own money or assets to keep the business running. An owner who will fight to keep his or her business open shows a true commitment and is attractive to lenders.

2. Capacity – This is the ability of a business to repay monies borrowed. Capacity is closely associated with cash flow. To obtain a business’s capacity, the lender examines historical and projected cash flows to determine whether a business can repay the requested loan amount.Cash flow is king, and the lender looks at cash as the primary source of repayment. When painting a full picture of a business’s capacity to repay, the lender may consider secondary sources of repayment, such as any outside income, the borrower’s history of making loan payments on time, and credit scores.
3. Collateral – Collateral is a tangible piece of property pledged as security for repayment of a loan. The lender needs to prepare for the worst-case scenario—when the borrower cannot repay his or her loan—so the lender uses collateral as a secondary source of repayment.

The lender uses collateral to secure the loan, assuring the lender that it can recoup its money, if the borrower defaults. In the event of default, the lender sells the collateral and gets its money back.The lender will consider assets that the borrower already owns as collateral. Usually collateral will be tangible assets that can be easily liquidated (i.e., real estate, machinery, equipment, stock). To determine how much the collateral is worth, the lender will apply a discount to the market value of the collateral to account for depreciation and loss during sale.
4. Conditions – Before extending credit, the lender will take the conditions of the economy and market into account. The lender’s goal is repayment of the loan. The conditions of the market and economy will allow the lender to determine the future success of the business based on current conditions. For example, if a borrower wants a business loan to open a doughnut shop during a low-carb craze on a street where 6 other doughnut shops currently operate, and 3 other doughnut shops closed last month, then the borrower may not get the loan.The lender is also mindful of the fact that it doesn’t have a crystal ball. Therefore, the longer the term (the repayment period) of the loan, the riskier it is for the lender. When the lender has long-term experience with the borrower’s particular business, it recognizes when negative business cycles may occur (almost as good as a crystal ball!), and the lender can build its experience into the structure of the borrower’s loan.
5. Character – Character is the trustworthiness of The borrower a business owner. The lender will examine the borrower’s character along with his or her ability to succeed (remember “skin in the game”?). Think of the lender examining the borrower’s character as a job interview: If the borrower has the right education and relevant work experience, he or she is more likely to get the loan. Because a new business does not have a proven record of success, the lender will look to you, as a borrower and business owner, to show that you can succeed. A great attitude and constructive business plan will help assure the lender that you will both reach your goals—your business will succeed and the lender will get its money back.