July 09, 2021

How to Negotiate Better Business Loan Terms

The good news is business loan terms are negotiable. You can work with the lender to modify your terms and improve the loan. In this post, we'll explain how term loans work and how you can negotiate small business loan terms that best fit your working capital needs.

What is a Business Term Loan?

This type of financing option is provided to small business owners seeking lump sum financing. Essentially, you'll receive a loan amount which you'll be required to repay in a set term. Some business owners seek shorter terms so that they can repay their balance quickly. However, other business owners prefer long term loans, which they can repay over the course of several years. In the section below, we'll dive deeper into specific terms that business owners can attempt to negotiate.

Business Loan Terms You Can Negotiate

There are several business loan terms that you may be able to negotiate including:
    • Interest Rate: Believe it or not, you can negotiate your interest rate and secure a lower one. This can potentially save you thousands upon thousands of dollars over the life of your term loan. Of course, a higher credit score is more likely to land you a lower interest rate.
    • Prepayment Terms: Some lenders charge a prepayment penalty for borrowers who repay their loans early. If you have plans to pay off your loan before the term is up, you can negotiate a smaller fee or no fee.
    • Repayment Fees: Take a close look at the fine print behind your repayment terms. You may negotiate any fees like the origination fee or processing fee that may make it more difficult for you to pay off your loan.
    • Personal Guarantees: Some business lenders will require that you personally guarantee you’ll repay the loan with your own personal assets if necessary. You may be able to address the personal guarantee while you negotiate your loan terms.
Keep in mind that large, well-known banks are usually less likely to budge on loan terms. They have very strict lending processes that they must follow. Due to this, bank loans aren't always the easiest to qualify for, and negotiating is usually out of the question too. Credit unions, on the other hand, are a bit more flexible when it comes to their loan terms. If you’re a member of one, you may have more success negotiating with them than a bank, especially if you’ve used their products and services for a while. Online lenders tend to have the most flexibility, making them a great place to go if you’d like to negotiate loan terms.

8 Ways to Negotiate Loan Terms

At first, negotiating loan terms may seem like a daunting, time-consuming process. If you do this strategically, however, it may be well worth it. Below are some tips for negotiating small business loan terms. By following them, you can increase your chances of securing the business term loan amount that you desire.

1. Know Where You Stand

Check your credit score as well as the lender’s requirements to get an idea of where you stand. If you meet (or exceed) their requirements, you’ll be in a much better position to negotiate than if your credit score falls short of their average.

2. Learn About the Lender

It's important to know your audience prior to negotiating and understand exactly who your lender is. Your negotiating options will vary depending on if the business lender is a large bank, credit union, online lender, or other financing provider. We suggest reading reviews about your lender to determine what types of borrowers they generally lend to. In fact, you may even find some negotiation tips from former borrowers.

3. Get to Know the Terminology

Before you negotiate with a lender, make sure you understand the terminology in your loan contract. Become familiar with terms such as loan-to-value ratio, balloon payment, and personal guarantee. If you’re unsure of what something means, conduct research to find out. Lenders are more likely to take you seriously if you make sense when you speak to them.

4. Take Advantage of an Existing Lender Relationship

If you’ve worked with a lender before in your personal or professional life, let them know. Lenders value long-term relationships and may be more likely to honor your request if they know you’re a loyal customer.

5. Offer to Put Up Collateral

One way to show the lender you’re serious about paying them back and worth negotiating for is to put up collateral, which is an asset you own. This may be equipment or commercial vehicle. If you default on your loan, they’ll have the right to repossess your collateral.

6. Be Clear and Polite

When you negotiate, be sure to treat the customer service representative with respect. Clearly convey what you’d like to negotiate and avoid defensive remarks.

7. Ensure That Your Loan Application is Strong

A strong application can do wonders for your negotiation strategy. A higher credit score, larger down payment (if one is required), lower monthly debts, and a well written business plan may all help. If you can wait for the funds, don’t apply for a loan until you’re confident your application is as attractive as it can possibly be.

8. Try Contacting Multiple Lenders

If you’re unsuccessful with one lender, don’t give up; instead, reach out to another lender to negotiate their terms. Remember that all lenders aren't created equal; you may qualify for financing from another lender.

Conclusion: Save Money by Negotiating Business Loan Terms

It’s all too easy to simply accept a loan offer as is, but you may not receive the best deal possible. By negotiating it, however, you can save thousands of dollars over the life of your loan. While there’s no guarantee you’ll be successful, using the tips above can boost your chances.