For most small businesses, banks remain the fundamental source of capital to finance current operations and future expansion. Because banks have something businesses want, namely money, businesses believe they have no leverage when negotiating loan agreements.
However, this is not the case. If business owners understand and implement the right approach to obtaining a loan, it can obtain favorable loan terms.
The following are general principles that a business owner should keep in mind when attempting to obtain a loan from a bank:
- Undertake significant research into the loan process to gain a complete understanding of it. If you do not have a high comfort level negotiating the loan, seek assistance from accountants, attorneys, and other business advisors.
- View the loan agreement with a long-term perspective. The terms and provisions contained in the agreement could apply over a five year period when business and economic conditions can change.
- Make sure any restrictions or covenants do not impair the flexibility of the business, the ability to take advantage of new business opportunities, and the ability to compete. Most bankers will not have as much experience in your industry as you. Therefore, you must educate the banker on industry practices, so loan terms do not put you at a competitive disadvantage.
- Arrange for bank financing before needing it. Don’t go to the bank when you need your money the most. The old adage “Those who don’t need the money can get it, and those who need it, can’t get it” is, unfortunately, true.
Remember, banks make money by lending money. As much as you want to borrow to expand your business, banks wants to lend so they can make money.