Taking a business loan is very scary due to the considerable consequences you'll suffer if you're unable to settle your debt on time. Despite that, a business loan is still essential for the success of your enterprise regardless of whether you're running an established company that's looking to expand or a startup that's struggling with cash flow.
But access to your desired amount is often not easy as lenders aren't quite open to handing over the requested funds, especially for young businesses. And without the funds, there's the real possibility that your business might soon die.
Therefore, you'll need to perfect your negotiation skills as a business owner when conversing with lenders. Here are a couple of tips you should follow when negotiating with a creditor to get a business loan:
1. Have A Detailed Business Plan
You must have a business plan right from the start when setting up your business. This file is essential because this comprehensive document outlines your business objectives as well as the strategies to achieve these set goals. A creditor will expect you to provide them with a business plan to show that you can set up your business correctly before they can process your business loan request.
In your business plan, you should include details such as;
- The main objective of your business
- Approximate startup costs
- How you're planning to use the funds
- Your proposed number of employees, if any, and their respective salaries
- How you'll be running your business
With all these details, the officer in charge of deciding whether to grant you the business loan will gauge your business acumen. If they're confident that you have a solid business plan, they will likely approve your request to get a business loan from the creditor.
2. Have a Negotiation Strategy in Advance
You should never approach a prospective lender without a negotiation strategy. This is crucial because it's in the negotiation strategy that you can clearly outline your non-negotiable elements and the issues that you're ready to negotiate on.
Some of the items you need to clarify when negotiating with the lender include;
- Interest rates
- Upfront costs
- Need for collateral
- The payment schedules
Knowing such details before entering into negotiation with the creditor is essential to ensure that you make the right decision.
3. Understand The Different Terminologies
Negotiating with a creditor usually feels quite intimidating. The best way to feel less anxious during the negotiations is by taking time to acquaint yourself with financial and business terms first. This doesn't necessarily mean that you have to become a financial expert, but you do have to learn the basic definitions and terms.
With a better understanding of the terms you're using, the lender will take you more seriously and see that you know what you're talking about. The most crucial business loan terms you need to learn are;
- Secured and unsecured loans
- Loan principal
- Personal guarantee
Another term worth knowing is Annual Percentage Rate (APR), which are the other costs and fees, such as closing costs, interest expense, discount points, broker fees, and rebates involved when taking out a business loan. Usually, APRs range from 5-30% and are either equal or greater to the nominal interest rate.
4. Know Your Company's Risk Profile
Lenders are in the business of making money, so they don't just dish out money to any business or individual who requests a loan. Instead, they first assess your risk profile to gauge whether you can pay back the business loan with the agreed-upon interest. You should use this similar approach, place yourself in the lender's shoes, and assess your company's risk profile.
When examining the risk of your company, there are a couple of things you need to do, such as:
- Identify your short and long-term goals
- Find out any weakness with your business model that can hinder you from achieving your set objectives
Knowing your risk profile before the lender avoids a scenario where you're caught off-guard. You can even request help from a friend or mentor to identify any weakness you didn't notice. This gives you time to remedy these weaknesses and prevent being unable to access the loan.
5. Find A Suitable Lender
Some lenders are known to prefer giving credit to businesses within a particular industry depending on their expertise. For example, a lender might prefer giving business loans to companies in the tech or finance sector due to their understanding of this niche. Therefore, this lender will most likely not approve your loan request if you run a restaurant business.
With this in mind, you should always start by doing exhaustive research in advance before approaching a lender for a business loan. This way, you won't waste your time and money applying for credit from a lender who most probably won't even consider your business loan request. However, a lender who's more familiar with your industry will be more than willing to provide you with the necessary finance to start or expand your business.
6. Pledge Your Collateral
Many lenders will demand collateral or security to safeguard themselves from financial loss. If you don't pay back the loan within the agreed-upon time, they'll either liquidate, manage, or lease the security.
Therefore, you should consider offering collateral, which makes the lender a lot more confident about approving your business loan. With that said, you need first to understand the risks of using a personal loan as collateral when securing a business loan.
7. Find a Financial Mentor
If you're running a startup, knowing the details on how to secure a business loan might be confusing. Without an in-depth understanding of these details, your probability of securing a business loan will reduce drastically. In addition, this affects the type of loan your lender will offer and the amount of money you'll be given. Because of this, you should find a mentor to guide you on how to come up with a solid negotiation strategy to increase your chances of securing a business loan.
The perfect mentor is an experienced businessman, preferably in your industry. This person will guide you throughout the entire process and increase the likelihood of securing the business loan.
Getting a business loan is essential to get you from any financial hurdle that might hinder you from achieving your business goals. But creditors may not always be willing to offer you credit, so you need to think of ingenious ways of convincing them. This guide has outlined several practical tips to incorporate when negotiating with creditors to stand a chance of getting the much-needed business loan.