Small Business Financial Article

Negotiating Tips for Getting a Business Loan

Negotiating Tips for Getting a Business Loan

When negotiating a business loan, the outcome is largely determined as a result of business owners’ preparations before applying for the loan. Preparing well ahead of your anticipated needs is the key to getting to "yes" on a business loan. A significant component of that preparation is to develop a business plan that explains precisely how your business will generate the revenue needed to repay lenders or investors.

Here are the key steps business owners need to take that will put them in a much stronger position when negotiating loan terms:

Build a solid business plan. Lenderswant to know about your products and services, your employees’ expertise, your current financial position and projected cash flow, and your marketing plans - everything required to effectively evaluate whether lending capital makes good business sense to the lender. Your plan should answer the key questions lenders have about your business, such as:

  • Can your business be profitable enough to repay the loan?
  • Who is your target market, and is there enough demand for your product or service?
  • Are there solid strategies for manufacturing, marketing, and delivering your product to market?
  • Does your management team have the competence and experience to execute the business plan?

The purpose of your business plan is to instill confidence in the lender that your business will be a money-making machine for both of you. It is also your most important tool for rallying your management team and employees around your mission and the strategies for achieving it. If you need to hire a business consultant to help you prepare it, consider it a worthwhile investment.

Work with your lender to ensure that they understand your business and industry.

Ride a rising tide. You strengthen your negotiating position when your industry or market sector is doing well. Lenders are more confident about your business potential when your market sector is thriving.

Be open and transparent. A solid relationship with a lender can only be developed through forthright communication. Be honest about your business’s strengths and weaknesses. But, when you disclose any weaknesses, have a plan for how you expect to overcome them.

Get your personal financial house in order. Most lenders require collateral for business loans. If business assets aren’t sufficient, they will look to personal assets, and some may require a loan guarantee from the business owner. Your personal balance sheet and your credit standing are strong indicators of your ability to manage debt and will be a factor in approving your loan.

Don’t wait until you actually need the money. There is no worse time to negotiate with a lender than when you are desperate for capital. With a solid business plan, you should be able to anticipate capital needs well in advance and begin preparations early. Most business owners need a capital infusion at some point, so starting a relationship with a business bank makes sense. They are always interested in starting new relationships, and a good business bank will happily provide guidance along the way.

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