Loan Resources and Information.

Negotiating with the bank can be one of the most important tasks. There are four essential steps to a successful negotiation.

Step One: Understanding What the Bank Wants And Giving It to Them

The first step to negotiating with a bank for acceptable terms is understanding what a bank wants to achieve by making a loan; the bank wants to realize a profit on the interest that they charge for the loan. While that concept seems easy to grasp, banks are concerned that the borrower will not have the ability to pay the loan back or that inflation will rise and eat away their margin of profit. When the bank feels that there is a risk of either inflation or non-payment, they will charge a risk premium to reflect the risk they might not make money.

Whatever the state your credit history may be in, the more prepared you are to answer the bank’s questions about how the loan will generate you money the lower your risk premium. If you have good credit history that lowers your risk premium even more. If you have a prior good history with the bank, this can eliminate the risk premium.

Step Two: Understanding What Terms Are Negotiable

For the general small to medium size business person, the negotiable terms of a standard bank loan include: 1) the loan amount; 2) the interest rate, 3) bank loan expenses and fees, 4) the number of years for repayment, 5) the number of years the interest rate is locked (if its an adjustable rate loan), 6) when interest and principle are due, 7) the maximum increase in the interest rate if its an adjustable rate loan), and the type and amount of collateral to be offered.

Banks at various times and for various types of clients may be less willing to negotiate particular terms. To determine what terms are likely to be negotiable, try contacting three banks, presenting your business plan and basis for borrowing, and asking them for a quote on their best terms for the loan the borrower seeks. Where the banks offer similar or nearly the same response for a particular term expect it will be difficult negotiate that term. Where the terms differ expect that a bank may be more willing to negotiate to beat its competition.

Step Three: Identify What Terms Are Important For You And Identify What You Are Willing to Give the Bank to Obtain those Terms

Once you have the quotes for terms from three banks identify what terms you would like to get. Terms you would like to obtain should be reasonable. Reasonable commercial