6 secrets to negotiating the best deal on your commercial loan

6 secrets to negotiating the best deal on your commercial loan. (Part 1 of 3)

Working capital loan for new business

Negotiating with most lenders on your business loan is possible if you do it right.

Not negotiating can be expensive. As an example a business that accepts a loan that is 1% higher than they otherwise could have negotiated, say on a $500,000 loan, pays an extra $5,000 a year for absolutely nothing.

In the nuance world of commercial lending however, finding and negotiating the best deal can be tricky. Here are a couple rules of thumb that may prove valuable.

1. Shop a few not a lot. You definitely need to meet with a few banks and make application but going overboard and making applications with too many of them at once will back fire.

Any experienced lender worth their salt is going to ask you the following question, “What other banks have you talked to?” and “What feedback have they given you?” These two questions help the lender get an idea of what obstacles they might run into getting your loan approved. In addition it gives them a good idea of what kind of pricing they may need to offer and who is their competition. If they hear from you that you are shopping lots of lenders, you may have weakened your ability to negotiate the best deal.

Here’s why. “I’m shopping many places” translates into a lender’s ears as “You’re wasting your time with this business owner and your limited energy should be spent on Borrowers who are not shopping every bank in town”. If you find yourself in this scenario don’t be surprised if the lender ask you to please come back, once you are done talking to all your banks, with the best deal you found and they will try to beat it.

Trying to conceal all the lenders you are working with, to an interested lender, will also back-fire when your lender sees all the recent credit inquiries from banks on your credit report.

Another big plus in shopping only a few lenders at a time is that it gives you the opportunity, when you get negative feedback, to change how you present your loan request to future lenders.

Example: A Business gets their start-up loan request declined by their first three lenders because of the Business Owner’s lack of experience. The Business now has the opportunity to figure out how to mitigate this concern and present a revised loan request to a new set of lenders who have not seen the loan request yet. In our example the business finds and hires a “key employee” with lots of experience and adds the new changes into their business plan. If the Borrower originally took a shotgun approach and presented the loan request to all lenders at once the loan would have a much lower chance of getting approved because the revised loan request would be going back to the lenders that declined the original loan.

For these reasons, as a rule of thumb, we recommend keeping applications limited to no more than 3 lenders at once.

2. Your bank is not going to negotiate with itself. Scenario: Great news, your hard work has paid off and you have gotten approved for your loan but the loan terms are more expensive than you want. You argue to your lender that the terms seems high but your Commercial Loan Officer, after checking with Senior Management, says that your terms are “very competitive” and they can’t budge with their proposed offer.

What went wrong?

As one of my Bosses in banking once told me when I relayed this same request from a Client “John, these terms are fair and we are not going to compete against ourselves”. As a general rule of thumb you don’t get a better deal because you think you deserve a better deal, you need to prove it.

How? A perfect real-life example of how you can prove you deserve a better deal comes from a past Client of ours who had a really strong loan request and wanted to get her loan at the place she banks. Her reasoning is that she loves everyone at the Branch and got along very good with the Commercial Loan Officer at the Branch who was helping her with her loan request. Like the above scenario, the problem our Client ran into was, she wanted a 10 year fixed rate loan and the bank would only do a five year fixed rate loan. Her repeated requests of needing an interest rate locked for at least 10 years was declined by bank’s Senior Management because “The bank at maximum only does 5 year rate locks”.

Our savvy shopper, unbeknownst to her bank, had a secret weapon. Prior to getting approved she had been working with us in securing financing from a competing bank. Her loan at the competing bank had reached the stage where a “Commitment Letter” had been issued. The Commitment Letter offered the same rate as her bank but it came with an interest rate that was locked in for 10 years.

After our Client’s Oscar winning performance of “Why does your competitor want my business more than you guys?” talk, her bank’s commercial lender quickly forwarded the competing Commitment Letter to her Senior Management who decided that they too can offer a 10 year fixed rate and as an added bonus they were also going to waive the processing fee because she is one of their most valued customers.

Moral to the story. This would have never happened without a competing offer in hand. After our Client’s loan funded her Commercial Lender confided to her that being able to show proof that she had been approved elsewhere, with better terms, enabled the Commercial Loan Officer to get our Client a better deal. 🙂