5 Tips to Negotiating a Business Loan in an Unstable Economy

Mon, 30 Jan 2012

Despite the uncertainty in the economy, banks still have money and they need to lend it.  So, here are five ways you can increase your chances to accessing some of this cash so that your business can grow and you can manage the payments:  

1. Clean Up Your Financial House

Before you fill out a loan application or even sit across the desk from a banker to negotiate the terms of your loan, make sure there are no surprises or unexpected red flags.  Just like a “white glove test” when checking your house for dust, the bank’s underwriters will comb through your business and personal financial records.  You might also want to double check the credit histories of everyone who plans to be a signor on the loan to make sure that there are no inaccuracies.  

2. Have a (Business) Plan of Action

It will help if you have a concrete business plan as to how you will spend the borrowed money and how that loan fits into your overall business strategy.  For example, you might be borrowing to buy additional equipment that will allow you to make more or better products.  How will that increased capacity affect your business’ overall growth?  Where do you plan to be in 5 years and how will this loan help you achieve your goals?  Be specific and be strategic.  

3. Be Scrupulously Honest

Getting a loan is a lot like dating.  Think of the bank’s underwriter as if he or she were someone you were going out with for the first time.  Just like “a little white lie” on a first date can have disastrous results or ripple effects later in the relationship, a fib or even a sin of omission on your loan application can come back to haunt you.  The foundation of any strong and lasting relationship is trust.  Don’t give the underwriter a reason to doubt your honesty.  

4. Compare the Smaller Terms and One-offs

When business people think about loans, they tend to dwell on one thing – the interest rate.  And yes, the rate is important, but it’s not the only aspect of the loan that matters.  Sometimes the term (how long you have to repay the loan) or the closing costs can be critical as well. What’s more, you can occasionally bundle seemingly unrelated cost savings into your consideration of a bank’s offer.  Consider this scenario, Bank A has offered you a 10 year loan at a certain rate and Bank B has offered a similar loan at a rate that is a quarter of a percent higher.  However, Bank B will give you 11 years to repay the loan instead of 10; their closing costs are $1500 lower and they will waive the cost of your remote deposit service for two years.  Despite the rate difference, Bank B’s offer may very well be the better deal.  

5. Be Patient and Don’t Take the Wrong Loan

Getting a loan, even when you meet all of the underwriting requirements, can take a while, so be patient.  Depending on the type of loan, there might be appraisals, environmental surveys and other paperwork that is required.  And, in some instances, you just might not get the rate or terms that you want or need.  The most important thing to remember is that accepting the wrong loan can be disastrous.  Many companies fail because of short term cash flow issues and not because there is something fundamentally wrong with their business model.   Whether you’re the bank lending the money and trying make a return for your investors or the business borrowing the money to grow your bottom line, it all comes down to risk.  What can you do to show the bank that your business is worth the risk?    In general, the more detailed information you can provide, the better off you will be.  And, ironically, this preparation is just as much for you as it is the bank.  In gathering the requested details, it should force you to evaluate whether you can achieve your goals with a given set of terms.  Dreams can become a reality but you need to be ready.