You can’t start or grow your business without funding. Unfortunately, applying for and getting a good business loan isn’t usually a fast or stress-free experience. On top of that, some small business owners believe that they have to take the loans at face value and can’t negotiate the terms. Thankfully, that is far from the case. So, what parts of a business loan are negotiable and what should you know before heading to the negotiation table?
You may assume that most parts of a business loan are fixed, but many parts can be adjusted and tailored better to your situation.
“[A customized loan] can give you the flexibility you need to move your company into the next phase of growth or take advantage of opportunities that can increase the profit and value of your company,” said Brooke Lively, founder and president of Cathedral Capital.
Here’s what you can negotiate.
This is often one of the most surprising negotiable terms, but you may be able to secure a lower interest rate on your business loan. Experts recommend preparing for the discussion so you can have a productive and, hopefully successful, conversation with your lender.
Some lenders may assess penalties for paying off the loan balance early or making loan payments before their due date. You can ask your lender to honor a smaller fee ― or no fee ― assessment on a loan balance payment.
As you examine the section of your loan agreement that covers repayment terms, pay special attention to any fees or clauses that could make it more difficult to repay your loan. Bring these to the attention of your loan officer and ask if anything can be done to make them more favorable for you.
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“Repayment terms are the thing that’s most likely to cost you extra money or to land you in situations where you’re having trouble paying off your loan,” said Jake Hill, CEO of DebtHammer. “Plus, lenders are more likely to budge on that than the interest rate.”
Some lenders require borrowers to personally guarantee that the loan will be paid back, which can put borrowers in a difficult situation if they struggle to repay the loan. While many small business owners assume that a personal guarantee is simply a part of any small business loan’s terms, you may be able to address those terms during the business loan negotiation process.
Although these parts of a business loan can be negotiable, much of your success depends on your existing relationship with a bank. According to Lively, a bank will take all your business with that institution, including personal accounts, into consideration while you negotiate a business loan.
“The more the banker understands you, your business model, your level of industry and business knowledge and your ability to verbalize where your business is going, the easier it will be for them to help you find the terms that are right for you and your business,” Lively said. “We always suggest working with a smaller regional bank where you can get to know your loan officer and other employees at the bank. They are your best spokespeople and advocates when your loan is in front of the loan committee.”
[Read Related: How to Choose the Right Business Loan]
You can negotiate your business loan’s interest rate, prepayment terms, repayment terms and personal guarantees.
Applying for a loan is one of the most crucial steps for a small business owner. To give yourself the best chance of getting approved, follow these tips for negotiating a business loan.
Research multiple banks before you apply for a loan. Like doctors, banks have specialties. You should find banks that are able to help you ― don’t waste your time applying to banks that can’t. Lining up multiple institutions also gives you a greater chance to be approved for a loan with favorable terms for your business’ needs.
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BJ Lackland, co-founder and chief information officer of IBI Spikes Fund, suggests seeking capital from multiple sources. “In any negotiation, it helps to have options,” he said.
You can only gather those options by doing your homework, so create a shortlist of banks that might be a good fit before rushing off to apply at the very first one you come across.
Bankers and lenders won’t take you seriously if you seem unprepared or unsure of what you’re talking about.
“Speaking the same language as your lender demonstrates that you understand the process and your responsibilities, increasing your lender’s confidence in you,” said Paola Garcia-Villari, managing vice president at Pursuit. “This can also help you spot warning signs that a potential lender may not have the experience you need or may demonstrate predatory lending behaviors ― either of which can result in a loan that’s poorly structured, with repayment terms that jeopardize your business’ cash flow.”
Before you apply for a loan, you should be familiar with these terms:
“Preparing for a business loan is like dressing for your wedding,” Espinosa said. “You want to look as attractive as possible and present yourself like a good risk.”
While you need to speak the part, so does your paperwork. Espinosa recommends getting copies of your credit report so you can identify any negative items and try to repair or remove them. “Have a letter of explanation prepared for any negative items that remain.”
You should also have your tax returns, fiscal year-end financial statements and year-to-date financial statements for the past three years.
“You should prepare a personal financial statement listing your income, assets and liabilities,” Espinosa said. “Have copies of up to six months of bank statements, recent broker and retirement account statements, copies of your life insurance policy and statement, any trust information and any recent appraisals you have had done.”
Before you arrive at the bank, make sure your paperwork is neat and organized. “Neatness, grammar, spelling and organization counts,” Espinosa said. “Sloppy requests don’t even get read and are often rejected immediately.”
Walter Gumersell, an attorney with Rivkin Radler who specializes in business negotiation, said small business owners should be wary of the personal guarantee. Many small business loans, especially those from online alternative lenders, require a personal guarantee to serve as collateral for your loan. A personal guarantee may make sense in some instances, but it’s a tool you should be aware of before signing a loan agreement.
Instead of (or in addition to) taking your business property as collateral, the lender may ask for a personal guarantee, which means that in the event of default, your personal assets can be seized to reconcile the debt. If your lender requires a personal guarantee, try to limit it to certain assets. Don’t ever sign a loan agreement that you feel will put your personal financial situation in jeopardy.
While it may seem counterintuitive, many lenders charge you a fee if you pay off your loan in one lump-sum payment. This is because, depending on your loan agreement, the lender collects less total interest if you pay off your loan upfront.
Variable interest rates can fluctuate and even fixed interest rates are charged on the remaining principal. As your loan matures and amortizes, the amount of interest you pay each month will be a result of the remaining principal. If you pay off the total principal and interest upfront, you’re not making future interest payments to the lender, which affects its balance sheets and total interest collected. You could also be paying less interest overall.
Gumersell recommends negotiating a prepayment option so you can pay off your loan immediately if you have the opportunity. This tip comes down to flexibility: You want to be able to be as financially nimble as possible. The option to pay off a loan in one lump sum means you can quickly attain financial freedom.
You need to be prepared before entering a business loan negotiation. Go to a bank that will be receptive to your suggestions and walk in knowing the terminology so the lender is more likely to take your requests seriously.
Ready to pursue a business loan and negotiate the terms that potential lenders initially offer you? In that case, you’re best off starting your funding search with the best business loan providers. These include the lenders below:
Applying for a business loan can seem intimidating, especially if you falsely believe that your lender won’t be open to negotiation. Going in knowing that you can ask for certain adjustments can relieve much of the stress. It can also get you one step closer to business funding that unlocks your biggest goals ― on nearly your exact terms.
Stella Morrison contributed to this article. Some source interviews were conducted for a previous version of this article.