6 secrets to negotiating the best deal on your commercial loan

6 secrets to negotiating the best deal on your commercial loan

Negotiating with most lenders on your loan terms 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 lenders 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.  J

Moral to the story. This would have never happened without a competing offer in hand. After the loan closing 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.

3. Be organized & Punctual.At the risk of sounding like a Nag this is a big thing for Loan Officers. The amount of work a Loan Officer has to expend to find a good loan and do the necessary work to put a formal loan request together is immense. Borrowers who are unorganized and not delivering the needed information in the promise time can sometimes be seen as Borrowers who don’t seem really motivated to get the loan.

With loans, like many things in life, first impressions are lasting impressions. Projecting an image that you are organized and serious will go a long way to setting yourself apart from the rest. Showing that you are organized and punctual will also put your loan request on the top of your Commercial Loans Officer’s “things I’m going to focus on today” list.

To help this process along, have at least an initial package ready to go.  This package should include the last 3 years of tax returns and a personal financial statement. If you are an existing business please also prepare a year to date P&L. If your business is a startup have a detailed business plan (please see our link on how to do your own business plan for free).

When your lender asks you for additional information give it top priority.  You want to develop the mindset that you are going to give the same commitment of time and energy as if you just started a part time job. Make requested items important. If your lender asked you for additional info at say 4PM that day try to have it waiting for them (in their e-mail) when they walk into work the next morning.

4. Make lenders aware that you are going to move your whole banking relationship. Shopping outside the area for a product or service makes sense for lots of things. Indeed Amazon.com would not be as profitable as they are if this wasn’t the case. What many business owners find surprising though is that when it comes to business financing, local banks and credit unions crush the outside competition.

Why? Local banks normally can give business customers a much better deal than out of area lenders because of all the revenue streams a new business relationship can mean to a bank. Besides loan income, local lenders can make money from business owner’s checking accounts, merchant card services, possible lock box services, and investing needs. The more aggressive lenders also targets the business owner’s employees for their bank needs. When you add all the profit streams together the pricing a local lender can offer on their business loans will be much better that an outside lender who is forced to price their loans solely on the revenue that their loans can generate.

I saw this firsthand when I worked for a bank that did a loan for a church. One of the stipulations Church Leadership agreed to was to fully support the bank and allow the bank to attend an upcoming church service. During the service Church Leadership got up and spoke to its membership of how important the bank was to the Church in helping in their time in need. Church Leadership asked its members to please move their banking relationship to this bank. The bank had employees at the Church ready to open the church members’ accounts and the end result was a slew of new and profitable banking relationships that justified the bank’s good pricing and decision to approve the Church’s loan.

When working with your lenders I recommend from the start to let each lender know of your intentions to move your banking relationship. Make copies of your deposit accounts and merchant card service statements so they can see for themselves how valuable your potential business is.

Your Loan Officer will be able to use your provided information during their weekly loan committee meetings when they explain to Senior Management the overall potential profitably of your new relationship.

5. Be aware of what kind of pricing you might get. How do you know if the 2-3 banks you met with, had great, average, or horrible pricing? For too many Business Owners the answer is you won’t?

CDs vs Business Loans. If you were looking for the best rate on a Certificate of Deposit the process would be pretty easy. You could go to a website like www.bankrate.com. Plug in the amount of your CD and how long you want the CD for and the website could give you a list from the vast majority of local and non-local sources who provided their data. Bankrate.com won’t give you a 100% of the banks’ CD rates but you could gather this missing banks’ info with a quick call to your favorite banks, where a Teller at the bank could read off the pricing to you. Unfortunately, business loans don’t work this way.

The answer why business loans don’t work like CDs has to do with the large amount of variables that go into determining….

• If you’re the type of commercial loan that the bank wants.
• How strong your loan is.
• How aggressive do they want to be in the terms that they offer you?

For many banks to quote pricing, they would also like a face to face meeting to learn more about your company. After that they need to crunch your financials and review your credit before terms can be discussed. This traditional loan process severely limits the amount of banks you will be able to talk to.

To get a sense of this time and energy-consuming hill you need to climb, in Palm Beach County alone there are 34 different commercial banks. Who can offer you the best deals?

Not knowing this answer can be frustrating and expensive since pricing can vary so much. Case in point – recently the real estate secured SBA 7a loan product had pricing for most lenders in Palm Beach County Florida at an adjustable rate of 6% (Prime + 2.75%). Within the County however there were two lenders that were offering a 25 year fixed rate in the 5% range and one lender in Palm Beach County that was offering a 25 yr. fixed rate of 4.75%. Not knowing what the range in pricing was for many business owners proved a costly mistake for those who took the higher 6% variable rate.

6. Rarely take the first offer.

As we can see from the above points there is a range where loans gets priced. Normally there is a minimum acceptable pricing by a bank and then a cushion gets added to that.

This added cushion the banks add, can be used when the bank needs to offer terms that are lower than their normal pricing in order to get a business relationship they really want or want to keep.

By using the above methods in negotiating for a loan you will be in a much better position to “shrink that cushion” and get the best business loan in town. Good luck!

John Patterson CFP® is a Co-Founder of The Best Business Loans in Town https://millenix.com/dev/tibblit/ which is a do-it-yourself website for business owners who want to quickly find the best pricing on a loan. John is a previous Banker who has 10+ years of banking experience and he is actively involved in helping businesses find the best deals on their commercial loans.