Tips on Financing for Your Business

Whether pandemic-related or not, struggling businesses look for financial assistance in the form of affordable conventional loans. And some profitable businesses may benefit from refinancing to more favorable terms on their existing debt. Doing so can help reduce interest expense and working capital requirements. Here are a few tips on how to get the best terms from your lender.

Negotiating is Your Friend

Take some time to review the loan agreement in detail and don’t be afraid to negotiate. On new loans, the initial offer is generally what the lender hopes you’ll agree to but there is usually some room for negotiation. And existing loans may be refinanced to achieve lower interest rates.

The assumptions the lender has made about your business’s level of credit risk might need to be challenged. You could be in a prime position to negotiate, for example, if your company’s performance or your personal credit score has improved over time. Your leverage hinges on how competitive the lending environment is in your geographic area or business sector.

Evaluate Loan Terms

First, think about the particular loan terms you want or need. Those might include:

Loan amount. If you need $200,000 but a lender’s first offer is $150,000, you’ll need to negotiate.
Collateral requirements. Pledging personal assets, such as investment accounts and home equity, makes you financially vulnerable. But it may be necessary in some situations.

“Cash dominion” terms. Some loans require that all payments on your receivables be directed to a lockbox at your bank that the lender controls so that it can claim enough of that incoming cash to cover your loan repayment obligations. This is generally an undesired arrangement for the borrower.

Repayment term. If the loan term is uncomfortably short, you could negotiate for a longer one to give you greater financial flexibility and predictability.

Loan covenants. These requirements and restrictions of the loan comprise the bulk of loan agreements. Some covenants are entirely reasonable, such as required property and casualty insurance coverage. Others may make you feel like a child under the watchful eye of a strict parent. For example, you may be required to notify your lender if your business suffers any setbacks and give your lender access to your financial records upon request. You also might be required to limit executive pay and dividend distributions.

Interest rate. This is the loan term that generally gets the most attention, usually for good reason. It’s the “cost” of the loan, which may either be fixed or variable based on a market index.

External factors can also affect your leverage in negotiations with lenders. For example, when numerous lenders compete for business from a small pool of prospective borrowers, you may have more leverage when applying for new loans and renegotiating old ones. Businesses in this situation may be able to play lenders against one another to get the most favorable terms.

It’s important to prioritize loan terms, based on what’s most important to your business. You might be willing to “give” on collateral requirements in exchange for a more favorable interest rate or longer repayment term.

Get Real

When negotiating financing, the trick is to refrain from overplaying your hand and impairing your credibility with prospective lenders. Gathering some intelligence on loan terms extended to similar businesses can help give you a feel for the market and what terms a lender would be likely to accept.

You can gain some insights by having casual conversations with a preliminary list of lender prospects. In doing so, you can also save yourself time by eliminating lenders from the list that don’t deal with many businesses like yours.

Assemble the Paperwork

Lenders prefer borrowers that are prepared, professional, and transparent. If there are any blemishes on your financial record, such as a negative credit report or outstanding tax issues, try to rectify them before seeking a loan or attempting to renegotiate an existing one.

When meeting with your lender, bring a full set of financial records, insurance contracts and other documents that might be relevant. The more evidence you provide, the better. Similarly, prepare your responses to potentially challenging questions that might be asked about your business.

We Can Help

Your CPA can be an excellent source of insights on how to use debt to meet your working capital and other financial needs. He or she can also help negotiate or renegotiate loan agreements with terms that make sense for your situation. Contact us <link to contact page> for assistance with your business loans.