This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.
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:
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:
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.
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