Tips for negotiating a business loan

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Last updated on June 17, 2014

Your ability to obtain a loan on cost-effective terms that suit you will depend on your negotiating skills in the loan interview.

Once you have identified your financial requirements, you need to ‘sell’ the business proposal to your financier.

The following tips will help you negotiate your business loan.

Be thoroughly familiar with your finance application and/or business plan

  • The lender will be seeking to appraise your business acumen and financial management skills.

Practise the language of the financier

  • By adopting and practising some of the more common terms, you will be seen as an experienced operator, well-versed in things financial and an able negotiator.

Develop a firm appreciation of the value of your business to the financier

  • Have full details ready about the services you are using, those you may tap into in the future and fee revenue generated by the lender as a result of its association with you.
  • Use this information to win a point or obtain a concession when negotiations are under way.

Establish your negotiation strategy in advance

  • Determine what aspects of the financing arrangement are highly important to you (non-negotiable), what aspects you are prepared to deal on or seek trade-offs (negotiable) and what you are prepared to give up early to demonstrate a spirit of cooperation (negotiating issues of low importance).

Determine the risk profile of your business

  • Identify the weaknesses of your business and where it may be vulnerable in the eyes of a financier.

Negotiate the interest rate payable

  • Choose between a fixed or variable interest rate.
  • If variable, link the interest rate to a market indicator.
  • Advance sound reasons to minimise perceived risk and seek lowest risk margin possible.
  • Choose any fixed term with care.
  • Seek ability to convert in future from variable to fixed or vice versa.

Negotiate the payment schedule

  • Determine an appropriate repayment term suited to your cash flow.
  • Consider interest-only finance where appropriate.
  • Ensure repayment arrangement is flexible.
  • Remember that the greater the frequency of payment of interest, the higher the return for the lender.
  • Check whether repayments are required in advance or in arrears.

Negotiate the security arrangement

  • Is the loan to be fully secured, partially secured or unsecured?
  • Where secured, ensure the security adequately meets the lender’s requirements without being excessive.

Negotiate the amount of fees payable

  • Determine once-only costs payable.
  • Determine any recurring fees payable.
  • Express fees as a percentage of the amount being borrowed to determine effective cost of borrowing.
  • Be alert to prepayment fees if you repay a fixed-term loan early.

Negotiate other issues

  • Be prepared to negotiate the terms of settlement and covenants and restrictions such as future presentation of financial information, and ability to borrow further.

Organise an interview with the financier

  • Be on time and well-presented. Use the interview to demonstrate commitment, enthusiasm and business acumen.

Know where any deficiencies are in your proposal

  • Be prepared to acknowledge deficiencies but answer related questions in a positive manner.

Maintain effectiveness of negotiation at all times

  • Do not become aggressive or argumentative.
  • Do not be over-optimistic and disregard the fact that all businesses have weaknesses and are vulnerable to risks.
  • Do not expect the lender to have more faith in your business than you do.

Summarise the essence of your proposal at the conclusion of negotiations with the financier

  • Indicate concisely the present and future financial needs of your business and demonstrate that you wish to build a relationship of mutual trust and confidence.
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