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Everything You Need To Know in Negotiating a Term Loan

Guest post by: Stan Prokop

Article Overview: The articles provide insights as to criteria used by banks and other finance firms in the negotiation of customer term loans . The focus is on ' be prepared '.

Everything You Need To Know in Negotiating a Term Loan

Most business owners and financial managers know the story - the bank has the money, you need it. Term loans can be a tough negotiation for any business owner. Part of that is simply because the final conditions imposed upon the bank can be somewhat restrictive.

As simple as it may seem, the business owner has to think like the banker - that allows one to reverse the negotiation stance to some degree. Also, it's all about 'strategy'.

We would point out also at the outset that there are a number of banks, and an equally larger number of independent finance firms that offer term loans. The business owner should ensure he is aware of the market players, and who offers what. The goal tends to always be the same though - get the largest loan at the best rate. Not easy to achieve!

Business people as we have said, should have a solid strategy in the entire process, and believe me it's a process.

Borrowers can benefit by doing research into the banks current market and objectives in commercial finance. There will be issues and objections raised by the bank on the owners submission - they should be dealt with in a manner that keeps the loan submission positive in nature. Thousands of books are written on the art of negotiation, and no business owner can expect to reasonably get the full amount with all terms that he or she asked for.

Term loans are generally for long term assets. They are paid by future cash flows and earnings. That bring two bear two key source of information that should be properly prepared - what has the business done financially, and what has it he potential to achieve - i.e. a forecast.

Banks focus on cash flow - so they will want to carefully look at what the risk is to those future cash flows. Business people should be prepared to talk thoroughly about their own particular industry, many industries are currently out of favor - example: automotive; many are sought and in favor: 'Green' industries - (solar, et al).

The owner should anticipate what risks the bank or other lender will perceive in their industry - they should be prepared to talk to those risks. Owners should also remember that although they need this term loan now for this asset, that the bank will also want to look into what else they might need in the future, which might have the ability to restrict the cash flow somewhat.

Unfortunately more often than not the lender looks to historical cash flow to reflect future cash flow - therefore is a company has lots of changes in sales and profits over the years the why's and wherefores around these need to be discussed and presented .

While the focus is definitely on cash flow the balance sheet will definitely come under scrutiny. Weaknesses in the balance sheet need to be tabled and discussed.

Banks love 'ratios'. We have called them 'number relationships' in previous articles.

It is highly recommended that the business owner review and understand some of those 'ratios 'which will come under scrutiny. Typically those are liquidity, operating, and fixed assed coverage ratios.

In summary, all banks and other finance firms have very similar and basic analysis models around term loans - they involve industry and financial statement analysis, focusing as much on the past and future as the present. It behooves business owners and financial managers to understand some of those metrics used by banker, which should, in the long run, limit loan restrictions and get the business owner the capital he or she needs.

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Article Tags: negotiating with banks, term loans



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