It may be counterintuitive, but the dark clouds that loom over the commercial lending industry these days may have a silver lining for borrowers. Banks need to lend money to make money. With credit at its tightest in over ten years, banks are hurting. For successful borrowers, that means loan terms and conditions may be more negotiable then ever.
The companies that are borrowing these days are, by definition, good customers, and good customers deserve the best deals. You can consider yourself among the most attractive if:
- Other banks are competing for your business
- You're a good credit risk: high credit scores, strong collateral, consistent profitability, and low leverage
- You're a continuing borrower and your performance has recently improved: higher profitability, better collections, improved inventory management, lower leverage, etc.
- You're a relationship customer: you use the same bank for a variety of credit and non-credit services (i.e. loans, business accounts, personal accounts, lock box services, letters of credit, etc.)
- You bring, or could bring, significant other business (i.e. trust services, cash management services, credit card merchant services)
- You're in a position to refer other business (such as that condo association account you happen to manage)
- You maintain significant "free balances" in non-interest bearing accounts — the money that sits idle in your account, not the money that flows through it
- You were referred by someone who refers them other business (i.e. your lawyer, accountant)
- You're personal friends with one of the bank's honchos
Deciding what to negotiate, or whether to negotiate at all, warrants some strategic thinking. For example, let's say you're negotiating a $100,000 line of credit, but only anticipate using the full amount during your peak season. You'll probably want to negotiate harder on the fee — which will be based on the full $100,000 whether you use it or not — than on the rate, which will only apply to the amount you use. Conversely, if you expect to use all of the line, focus on the rate rather than the fee.
Here are some of the more negotiable loan terms and conditions:
1. Loan rate
Try countering with pricing that's fifty to a hundred basis points (.5% to 1%) lower than their original offer. Compromise on a rate that's twenty-five to seventy-five basis points lower than what's offered. Don't be afraid to split hairs. If they won't go for a quarter of a percent, try an eighth. After all, they should admire your frugality.
2. Loan points
Your total loan cost includes both fees and interest. In consumer lending, this cost is disclosed as annual percentage rate or APR, but no such disclosures are required in commercial lending. Take the time to calculate the full cost of the loan before you start negotiating.
3. Loan term
If they offer a 10-year term loan with a 5-year balloon, counter with:
- No balloon
- A 15-year term with a 5-year balloon (Be prepared to show them that the useful life of whatever you're financing warrants a 15-year term.)
- A 7-year balloon
- An interest-only period (This is particularly arguable if the loan is for something that isn't going to immediately improve performance.)
4. Other loan fees
This includes prepayment penalties, cleanup fees, over the limit fees, compensating balance fees, non-use fees, missed covenant fees, etc.
5. Personal guarantees
Though in this market, if they already have them, it's not likely they'll let them go.
6. Collateral requirements
If your assets have appreciated or your borrowing needs are lower, it's reasonable to request the release of collateral. If you've been on a strict asset-based lending formula and your performance has been good, see if they'll loosen the formula or do away with it altogether.
7. Financial covenants and conditions
Such as liquidity, leverage, and profitability ratios.
8. Financial statements requirements
If the new loan requires quarterly review-basis statements, argue for compilation statements. If it requires annual audited statements for the first time, argue for review-basis statements; perhaps even offer to switch to an accountant they know and trust — and, by the way, receive referrals from.
9. Other bank fees
These are fees for checking account, merchant services, lock box, etc.
And now for the 180-degree view. At the end of the day, pricing shouldn't be the deciding factor in your choice of banks. In the long term, developing a relationship with a banker you can trust, grow with, and even like is far more important than paying the lowest possible rate. A strong relationship with a lender can make or break you if you run into financial trouble down the line. A quarter point on a $100,000 loan costs $250, but a good relationship with your banker is priceless.
Over the past thirty years, Kate Lister has owned and operated several successful businesses and arranged financing for hundreds of others. She’s co-authored three business books including Undress For Success—The Naked Truth About Making Money at Home (Wiley, 2009) and Finding Money—The Small Business Guide to Financing (2010). Her blogs include Finding Money Advice and Undress4Success.