How to negotiate a business loan

  • Negotiating the terms of your business loan can help your business move more easily to the next stage of growth.
  • Your interest rate, prepayment terms, and personal guarantee provisions are three important areas that you can negotiate.
  • Before you head to the negotiating table, you need to know the key terminology to present the best deal for your business.
  • This article is for small business owners who are considering borrowing money for additional financing.

You cannot start or grow your business without funding. Unfortunately, applying for and obtaining a business loan is usually not a quick or stress-free experience. On top of that, some small business owners feel they have to accept loans at face value and cannot negotiate the terms. Fortunately, this is far from the case. So what parts of a business loan are negotiable and what do you need to know before you head to the negotiating table?

What parts of a business loan can be negotiated?

You can assume that most parts of a business loan are fixed, but there are many parts that can be adjusted and better suited to your situation.

“[A customized loan] can give you the flexibility you need to move your business into the next phase of growth or take advantage of opportunities that can increase the profits and value of your business, ”said Brooke Lively, Founder and President of Cathedral Capital.

Here is what you can negotiate:

Interest rate

This is often one of the more surprising negotiable terms, but you may be able to get a lower interest rate on your business loan. Experts recommend preparing for the discussion so that you can have a productive and hopefully successful conversation with your lender.

Prepayment conditions

Some lenders may impose penalties for prepaying the loan balance or repaying it before the due date. You can ask your lender to honor a lower charge – or no charge – assessment on a loan balance payment.

Repayment Terms

When reviewing the section of your loan agreement that covers repayment terms, pay close attention to any fees or clauses that might make it harder to repay your loan. Bring them to the attention of your loan officer and ask if there is anything that can be done to make them more beneficial to you.

“The repayment terms are what are most likely to cost you extra money or put you in situations where you are having difficulty repaying your loan,” said Jake Hill, CEO of DebtHammer. “Plus, lenders are more likely to move on it than the interest rate.”

Personal guarantees

Some lenders require borrowers to personally guarantee that the loan will be repaid, which can put borrowers in a difficult position if they are having difficulty repaying the loan. Although many small business owners assume that a personal guarantee is just part of the terms of any small business loan, you may be able to address these terms during the business loan negotiation process.

While these parts of a business loan can be negotiable, a lot of your success depends on your current relationship with a bank. According to Lively, a bank will take all of your dealings with that institution – including personal accounts – into consideration while you are negotiating a business loan.

“The more the banker understands you, your business model, your level of industry and business knowledge, and your ability to verbalize where your business is going, the easier it will be for them to help you find the right terms for you. and your business, “said Lively.” We always suggest working with a small regional bank where you can get to know your loan officer and other bank employees. They are your best spokespersons and advocates when your loan is before the loan committee. ”

[Read Related: How to Choose the Right Business Loan]

5 tips for negotiating a business loan

Applying for a loan is one of the most crucial steps for a small business owner. To give yourself the best chance of getting approved, follow these tips for negotiating a business loan.

1. Do your homework and get to the right shores.

Alex Espinosa, SBA loan consultant and founder of BOLD Lender, recommends researching banks before applying for a loan. Like doctors, banks have specialties. You should find banks that can help – don’t waste your time applying to banks that can’t.

[Related content: Loan Application Mistakes to Avoid]

“Some banks are good at lending to restaurants and others at lending to gas stations, but many lenders reject those categories,” Espinosa said. “I would start by researching all the banks headquartered in my county and start investigating them, starting with the smallest. A good place to start is the FDIC website.”

BJ Lackland, co-founder and CIO of IBI Spikes Fund, suggests seeking capital from several sources. “In any negotiation, it helps to have options,” he told Business News Daily.

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2. Know the terminology.

Bankers and lenders won’t take you seriously if you don’t seem prepared or know what you’re talking about.

“Speaking the same language as your lender shows you understand the process and your responsibilities, which increases your lender’s confidence in you,” said Paola Garcia, vice president and small business advisor at Pursuit. “It can also help you spot warning signs that a potential lender may not have the experience you need or may exhibit predatory lending behaviors – either of which can result in a poorly structured loan, with repayment terms that put your business’ cash flow at risk. “

Before applying for a loan, you should familiarize yourself with these terms.

  • Balloon payment: “[This is] the outstanding balance owing at the end of a term loan for types of loans that do not fully amortize over the life of the loan, ”said Gennady Litvin, partner at Moshes Law. “The lump sum payment is due at the end of the loan to pay off the balance in full.”
  • Fault: Litvin defined this as “the failure to make the agreed periodic payments on a loan”.
  • Financial commitments: “These are financial safeguards in which you have to operate your business,” Lackland said. “If you get out of these, you will be in default and the lender may demand immediate repayment.” Financial covenants can include a minimum cash balance in your bank account, a minimum level of profitability, and asset coverage of cash flow ratios.
  • Loan to value ratio: “[This is] the ratio of a loan to the value of the asset purchased, “Litvin said.” This is one of the measures used to assess the risk on a potential loan. “
  • Personal guarantee: “If you personally guarantee a loan, it means that not only is your business at stake, but your personal assets are at risk as well,” Lackland said. “The source of capital could come after your house… Try to avoid a PG as much as possible.”

3. Be prepared.

“Preparing for a business loan is like dressing for your wedding,” Espinosa said. “You want to look as attractive as possible and present yourself as a good risk.”

While you need to talk about the part, so do your papers. Espinosa recommends getting copies of your credit report so that you can identify negative items and try to repair or remove them. “Have a letter of explanation prepared for any negative items that remain.”

You should also have your income tax returns, year-end financial statements, and cumulative financial statements for the past three years.

“You should prepare a personal financial statement listing your income, assets and liabilities,” Espinosa said. “Have copies of up to six months of bank statements, recent broker and pension account statements, copies of your life insurance policy and statement, any trust information and any recent valuations. that you did. “

Before you get to the bank, make sure your papers are tidy and organized. “Cleanliness, grammar, spelling and organization matter,” Espinosa said. “Sloppy requests are not even read and are often rejected immediately.”

[Read Related: The Small Business Owners’ Guide to Getting an SBA Loan]

4. Try to limit personal guarantees.

Walter Gumersell, a lawyer for Rivkin Radler who specializes in business negotiation, said small business owners should be wary of personal guarantees. Many small business loans, especially those from alternative online lenders, require personal collateral to serve as collateral for your loan. A personal guarantee can make sense in some cases, but it is a tool that you should know before signing a loan agreement.

Instead of (or in addition to) taking your business assets as collateral, the lender can ask for a personal guarantee, which means that in the event of default, your personal assets can be seized to reconcile the debt. If your lender requires personal collateral, try limiting it to certain assets. Never sign a loan agreement that you think will put your personal financial situation at risk.

5. Negotiate your prepayment right.

While it may seem counterintuitive, many lenders charge you a fee if you pay off your loan in one installment. In fact, depending on your loan agreement, the lender receives less total interest if you repay your loan in advance.

Variable interest rates can fluctuate, and even fixed interest rates are charged on the remaining principal. As your loan matures and amortizes, the amount of interest you pay each month will be the result of the remaining principal. If you pay off the full principal and interest up front, you don’t pay future interest to the lender, which affects their balance sheets and total interest earned. You might also pay less interest overall.

Gumersell recommends negotiating a prepayment option so that you can pay off your loan immediately if you get the chance. This advice comes down to flexibility: you want to be able to be as financially nimble as possible. The ability to repay a loan in a single installment allows you to quickly achieve financial freedom.

To remember : You must be prepared before entering into a business loan negotiation. Go to a bank that will be receptive to your suggestions and know the terminology so the lender is more likely to take your requests seriously.

Stella Morrison contributed writing and reporting for this article. Some source interviews were conducted for a previous version of this article.

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