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Negotiating Bank Loans: Tips for Business Owners

Posted by Concannon Miller on Mon, Mar 21, 2016

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Negotiating Bank Loans: Tips for Business OwnersEvery business owner will need access to debt at some point in the lifecycle of their business.

Applying for and negotiating bank loans can be a mystifying experience for business owners. The main concern bankers have is protecting their capital, therefore bankers are generally very conservative.

Their top priority is to properly underwrite and collateralize the deal to insure they will be able to recoup the principal amount of the loan. Their next priority is to earn a reasonable rate of return on the loan. And their third priority is to provide a level of expertise and service so you value the relationship and will do more business with them.

Your job is to provide the banker with the documentation and information to feel comfortable with understanding and approving the loan request. Consulting with and working in partnership with your accounting firm to provide a well-prepared financial packet can simplify and de-mystify the process. 

Here are some tips to help you navigate the world of credit: 

  • Be prepared: Have up-to-date CPA-prepared financials ready for the bank to review at the time of your loan request. Be sure to include at least two years of historical comparative P&Ls and Balance Sheet information and the most recent trailing 12 months on all business entities as well as any management companies. Provide written explanations of any one-time credits or expenses and also any changes that have been made that will affect any of the sales or expenses. Have a Personal Financial Statement prepared for your lender to review that accurately reflects your current personal financial position.
  • Understand your terms: When you talk with your banker be sure to look at all the alternatives: short term notes, revolving lines of credit, traditional bank-term loans, weighted average-term notes, fixed rates and floating/variable rates. What is your monthly payment and is it fixed or variable each month? Can you pay down or pay off the loan early without any financial penalty? What other costs and fees may be associated with the loan?
  • Consider a deeper relationship with your banker(s): Developing a robust relationship with the bank(s) you do business with may be another way to be rewarded with favorable pricing and terms. Banks typically negotiate better pricing on your credit deal if you also have depository business and/or a commercial credit card with them. Build a foundation for a lasting banking relationship that is beneficial for you and for the bank. Longstanding bank relationships can add ease of doing business and extra value to your organization.
  • Check out the competition: Creating some competition among banks is often an easy way to improve the terms of the deal. Work with your accountant to put together a short document that outlines your debt requirements for the next 3 – 5 years. Invite well qualified banks to provide you with a proposal and pricing that helps your company reach those goals. Compare terms and interest rate options to make the best choice.
  • Clearly understand the terms: What are the loan covenants and how often are they reviewed? What happens to the loan and/or pricing if you have a covenant breach? Is your interest rate fixed or floating? Do you have prepayment penalties or rate breakage fees? Is the loan assumable by a family member if you shift ownership of your business within the family? What is being used as collateral? How do you have that collateral released if you sell all or part of your business holdings?
  • Seek good advice: Consult with your banker and your CPA to determine what debt structure serves you best, not just for the immediate borrowing need, but for any future borrowing needs.

 

Topics: Business consulting

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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