6 Tips for Negotiating a Business Loan

Be an adaptable manager

Understanding what a business banker wants and being prepared before you meet with her will greatly increase the likelihood of obtaining the small business loan.

I normally do not write articles targeted at start-ups on this site. My target (and the bulk of our readers) are companies that have several employees, at a bare minimum, and a few million in revenue. However, I thought the content of this article, although targeted at start-ups and new entrepreneurs, was very applicable to my target audience because many of you do not pursue debt financing out of fear or do not know how to obtain more than working capital lines of credit.- TCW

Entrepreneurship is on the rise in America as people leave traditional jobs behind to start their own businesses. If you are thinking of taking this path, there is much to consider, especially from a financial standpoint. Many entrepreneurs are often surprised at the time and cost of starting their own business, so it is important to plan ahead. If seeking out a loan to get your business going is a part of your financial strategy, learning a few negotiating tactics ahead of time can help you be better prepared.

1.     Create a Detailed Business Plan

One common mistake many would-be entrepreneurs make is to apply for a business loan before creating a solid and detailed plan. Because it is the loan officer’s job to gauge your business acumen, having a plan in place and being able to answer his or her questions pertaining to your fledgling company can increase any lender’s confidence in your ability to be a successful business owner.

Before you speak to a loan officer or fill out a loan application online, take the time to prepare a written business plan. Ask yourself as many questions as possible about startup costs, projected earnings, how many employees you plan to hire, and other details your loan officer might ask you about. The more confident you are about your business plan, the greater the chances you will impress a lender and score an affordable loan.

2.     Learn the Language of Business

While talking to a lender can be daunting, you can feel more confident by taking the time to learn some business and financial terms and what they mean. You do not have to become an expert in the field, but learning some common expressions and definitions may make you feel more comfortable during the application process. For example, you might want to learn the difference between secured and unsecured loans, how collateral works, and how an annual percentage rate might affect your loan terms.

3.     Plan a Negotiation Strategy

Just as a detailed business plan might help you secure a loan, having a negotiation strategy in place can help you understand which details are a high priority for you. For example, if the lender offers you several different loan options, being prepared and knowing which terms are the most acceptable for your financial situation can help you make the most informed decision. Work out which terms are non-negotiable and which you might be willing to alter before you speak to a lender.

4.     Find a Financial Mentor

As an up-and-coming entrepreneur, there may be many details about obtaining a business loan that elude you. Because this can affect how much money you receive or even the kinds of loans you get offered, you may want to consider finding a mentor who can help you build a negotiation strategy.

You can either find a local mentor who is willing to work with you, or you can learn from veteran entrepreneurs such as Eugene Chrinian, who began his career in the furniture business as a salesman and now owns a chain of successful stores. Reading about the tactics of successful businesspeople can inspire and educate you as you negotiate your own path to success.

5.     Create a Risk Profile

If you are going to negotiate an affordable and viable business loan, then you need to look at your business through the eyes of a lender. When banks and other financial institutions loan money to small business owners, they assess what type of risk that company is and what they stand to lose if the business fails, and this something to consider before you try to secure a loan.

One of the most effective ways to gauge how risky your business plan is to create a risk profile. Begin by listing your goals, both long and short term, and then identify where your company’s weaknesses might lie and what might keep you from accomplishing your goals. If you can see a risk or weakness, chances are that the lender will identify it as well. Ask a friend or your mentor to cast a critical eye on your risk profile too, as having a fresh set of eyes on it may help you catch weaknesses you failed to see.

6.     Hone Your Business Persona

Effective business negotiation requires that you communicate your needs and wants to the lender in a way that is both reasonable and confident. However, it is important that the way you conduct business does not come across as too brash, aggressive, or petulant. Present your business plan simply, and then listen to what your lender has to say. Remember, it is the loan officer’s job to look at your proposed business plan with a critical eye and let you know what risks may be present.

Negotiating a business loan can be a challenge for any fledgling entrepreneur. However, if you plan accordingly, find a mentor to help you, and take the time to learn about what might be involved, your chances of securing a loan can improve.