Taking out a small business loan isn’t ordinarily, a bad thing, especially for a small or startup business. The success of your startup or small business often depends on, among other things, access to funding. Often, though, when it comes to borrowing, business owners feel that they are at the mercy of the lender. You should understand that banks, financial institutions and alternative lenders are also competing for business—yours! In fact, in today’s competitive business environment, the ability to negotiate a loan successfully for your small business, even if your business have bad credit and you need a bad credit loan, can be the difference between success and failure. Bearing this in mind, if you are wondering how to get a business loan, we suggest that you do your homework and do not be afraid to ask for what you want.
Most startup business loans are flexible enough to be used for just about any small business needs. The loan payments are usually determined by four things: loan amount, interest rate, term, and security (or collateral). Before you approach a lender for funding, you should know the type of financing options available to you: short term loans, SBA loans, equipment financing, lines of credit, business credit cards, and more. You can also use a business loan calculator to figure out your monthly payment.
Then, with a business plan in hand, approach your lender(s) and, above all else, be ready to negotiate! It will more than likely take some give and take. And while in the past a lender used to hold all the cards, the fierce competition means that is no longer the case. If negotiations aren’t working with one, either change your tactics, accept what they offer, or go elsewhere. You are not limited, by any means. Remember, banks are in the business to make money and turning you down is not necessarily in their best interests. They have something to lose, too, if they fail to grant your small business loan request.
Having said that, let’s look at those tips which can help you when negotiating a business loan.
1. Have a Comprehensive Business Plan
A business plan is a written document that describes in detail your objectives and strategies for achieving your business goals. This is the most important document a lender would like to review before inviting you to discuss possible funding of your business. Usually, business plans are submitted to the prospective lender prior to invitation to negotiate, so it very important that you are well prepared to defend your company’s objectives and strategies. At a minimum, a good business plan will include estimated startup costs, a pro forma analysis of profit and earnings, the number of employees expected to be to hired and applicable wages.
2. Be Familiar with Lending Terminology
Before you start your loan negotiations, it would be prudent to familiarize yourself with the lending terms and products which may be discussed. Below are just a few of the more common business loan terms likely to be brought up in the discussion (or else found in the loan application).
Loan Principal
The Loan Principal is the amount available to you to use as and when you see fit. Any part of this amount disbursed to you becomes principal outstanding, which means that this is the amount you have to repay to the lender. The principal amount may be different from the amount you applied for, as the approval review process will ultimately decide how much credit the bank is willing to offer. Note that certain lenders, depending on the type of loan (more often a business line of credit), will charge you a monthly commitment fee if you do not use the loan; as such, you should be ready to drawdown on the loan as soon as it has been approved.
Default
As part of the Loan Agreement, there is a specific clause stipulating conditions under which you will have defaulted on your loan. You should know that some of those conditions may not be under your control but you are still responsible. Essentially, default means a borrower is unable to pay back borrowed amounts during the stipulated period or else has failed to abide by one or more of the loan terms.
Equity
Most startup businesses use some form of equity, very often personal savings, or loans from family and friends, to start their business. Lenders will be interested to know how much equity you have invested in your business. This will give the lender a fairly good idea about your commitment to the success of the business, which could impact on the lending decision. In some instances, equity could also be a reference to the value of your collateral as applicable to a secured loan.
Security
This is the same as collateral. By definition, secure is the assets pledged by the borrower for the loan, which the lender will “secure,” generally in the form of a UCC-filing, lien or mortgage. If you default on the loan, the lender will take possession of the assets.
Negative Amortization
This situation occurs whenever a principal repayment amount for any period is less than the interest charged over that period. In that case, the outstanding balance of the loan will increase. It is important that you not pay less of your principal amount each time a payment is due.
3. Have a Negotiating Strategy
Usually, prospective entrepreneurs will have a negotiating strategy; often, however, it’s not a convincing one. To have a very effective and successful negotiation, it is important that you have your business plan well-rehearsed and, if needed, seek the assistance of experts. Know exactly what you want from the lender and what you are willing to compromise on. It is possible to ask for a pre-negotiation meeting during which you will find out exactly what the lender is looking for; this will help you to revise your negotiation strategy ahead of the final negotiation.
Here are examples of items you can effectively negotiate:
Payment Schedule
All lenders are required to provide the borrower with a loan repayment schedule. However, you can negotiate the terms, taking into account, your projected cashflow. Even after disbursement, you can go back to the lender to renegotiate the repayment terms. Be aware that some lenders do charge a fee for early or prepayment of an outstanding loan, which you should be made aware of in advance.
Upfront Costs
This isn’t a negotiable item to your loan contract, per se, as much as it is awareness and avoidance where possible. By law, lenders are not permitted to hide fees or surcharges. If there is an upfront fee for doing business with them, it would be in your best interest to take your loan request elsewhere.
Interest Rates
This is by far one of the most important items you can and should try to negotiate in your favor. A single percentage point reduction could potentially save thousands of dollars (or more) over the life of your loan. Of course, you will need to have a sound argument as to why your rate should be lower (or at a fixed rate of interest versus a variable one), so have evidence in hand which can support your assertions. Also, if initially unsuccessful, don’t hesitate to renegotiate the interest rate in the future, provided you have made all required payments and met the loan agreement terms appropriately.
Need For Security
Depending on the loan amount, you may be able to argue in favor of an unsecured loan. Moreover, any loan which is to be secured must have collateral of an adequate value relative to the loan amount. In the cases where the LTV (loan-to-value) is not sufficient, you may be required to put up some other form of collateral or else your Personal Guaranty of the loan.
4. Find a Mentor
While your business might be new to you, you certainly won’t be the first in the industry. It would be in your best interest to seek out a mentor in your field who can offer advice and guidance. Especially as it relates to obtaining funding, a mentor can give you the ins and the outs as to what a lender is looking for. Of course, someone who is local who can act as a mentor is preferred, but don’t discount the Internet either if you are unable to find a mentor near you.
5. Bring Your Poker Face
Some passionate entrepreneurs tend to get a little too emotional from the pressure of securing a loan. Yes, lenders want to see passion, but they are not looking for an emotional wreck. If you can portray yourself as a reliable, level-headed, steely-eyed business owner looking out for the best interests of his company and his employees, you will go a long way toward earning respect. Be forthright and honest; don’t oversell or over-promise. Recognize that the lender is taking all the risks and do your best to show that you and your business will be a worthwhile and profitable investment for them.
6. Create a Risk Profile on Yourself
This requires you to think like a lender, and assess the possible losses your lending partner may incur by lending you money. This will require you to compare your company’s vision and mission against limitations that they might face. Creating a risk profile does not mean you lack faith in your business; instead, it means you are being realistic with what is at hand.
7. Research the Lender
This is what is known as doing your homework; in lender parlance, it is “due diligence.” Learn where the lender’s interest lies; are they more inclined towards particular fields such as e-commerce or finance, or are they a broad-based lender?
If your business is part of a niche industry that a specific lender prefers, that’s a plus for you, and your negotiation may be easier as a result. If not, you may find yourself in an uphill battle trying to entice a lender who does not have experience in the industry or sector; then you will need even better negotiating skills to convince such lenders of your company’s capabilities and its ability to satisfy the debt.
Other Tips to Aid Negotiations
While the foregoing are the most important tips for successfully negotiating a loan, there are other considerations you should know.
For example, even if a business loan for your small business is in the somewhat distant future, you may wish to create a deeper relationship with your intended lending partner now so that you can foster a greater degree of trust. To that end, see which other bank services you can avail yourself of, either personally or professionally, to strengthen the bond between you. Even if you don’t use a traditional brick-and-mortar financial institution but rather an alternative lender, check out their other services and opt in where you can.
It is also in your best interest to be cognizant of the role of the credit score. The personal credit score informs your lender of your money management techniques. It is one of the most important factors for securing a loan. It is important that you know what your credit score is in case you have to defend it (say, if it is only fair). Because the credit score is nothing more than a number, a lender will want to know if there were extenuating circumstances which resulted in the score obtained.
A business credit score, on the other hand, informs your lender or your company’s ability to satisfactorily repay its outstanding debt. Of course, this is relevant only if your business has been in operation for a while, or if you had previously owned a business that had a score. Essentially, the business credit score is testament to your skill as a manager/owner of a business.
Final Thoughts
Negotiating for a business loan is not easy but, with the right skills and techniques, you can master the art. That said, it is helpful to recognize that negotiations can only go so far; other important factors can also shape the outcome of your loan application. Regardless of the lending decision, if you continue to be passionate about your business and can advocate well on its behalf, never give up on your quest.
If you loan was rejected, we recommend that you explore 11 Reasons Your Small Business Loan Application Was Rejected.
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