A business loan is one of the biggest financial commitments you will have in your life, which means you should be prepared to bargain for the best offer. In India, there are many banks that offer term loans, small business loans and many of them are negotiable. Therefore, you will have to negotiate for the best during the loan process.
Here are a few key tips to secure the best possible business loan.
Know your business plan:
To negotiate with the bank, be ready with a detailed business plan. This plan should give an overview of what is the purpose of your business venture, how you plan to run your business and how you intend to use the funds from the line of credit. Also, be prepared to explain yourself if the bank asks about certain detailed information like bank statements, credit report, your business vision. This will boost the lender’s confidence in your ability to run a successful business.
Establish your negotiation strategy in advance:
Once you have done your homework on choosing the right banks that can offer you the loan, determine what aspects of the financing arrangement are highly important to you, what is non-negotiable and the aspects that are negotiable to give up easily. Being prepared and knowing which conditions are the most acceptable for your financial need can help you make the most informed decision.
It is always better to approach a bank that has good long term relationship with you.
Negotiate the interest rate payable:
Interest rate indicates the interest charged on a loan. It plays a huge impact on your monthly payments. Negotiating a lower interest rate from your credit issuer can help you lower your overall debt so you can pay it off more quickly. Any decrease in your interest rate will reduce the amount you are paying in interest the most, allowing more of your payment to go toward paying off the principal.
Negotiate the payment schedule:
Ask your lender for better payment terms so that it gives you the ability to make use of your cash in ways that can add to your bottom line.
Negotiate the security arrangement:
Your ability to repay the loan amount will uplift the lender’s confidence in offering you a business loan. Most of the lenders demand for pledges of as much security (collateral) as possible to protect themselves, which they can then lease, manage, or liquidate in case of a business failure. In such situations, negotiate with the lender and try to limit your personal assets as security for your loan. Beware of all the risks involved before signing the loan agreement.
Additional Reading: Factors Affecting Interest on Business Loans
Know about Prepayment Penalties
Many lenders charge you a fee if you pay off your loan in one lump-sum payment. This is because, depending on your loan agreement, if you pay off your loan upfront, the lender collects less interest. You could also be paying less interest overall. But lender may penalise you for making prepayments as this may affect their balance sheet and total interest. Hence, beware of such prepayment penalties so that you may pay only what is needed and don’t make any extra payments.
It is recommended to negotiate for a prepayment option from the lender so that you can pay off your loan immediately if you have the opportunity without paying any penalty.
Determine the risk profile of your business and know where any deficiencies are in your proposal: