Business Loan Agreement
When it comes to business loan agreements, everything is negotiable
Here’s a fact for you. Did you know that that scary-looking loan agreement contract from your lender is negotiable?
Indeed, you can haggle the interest rates, fees and even annual review requirements.
The business loan term sheet is essentially the bank’s initial offer to get your business. Read again. The bank wants your business. Therefore, you have the power to negotiate the terms of their business loan offer.
So how can you get the bank to make you an offer you can’t refuse?
How does a business loan term sheet work?
Basically, a business loan agreement is a document that specifies the details of the bank’s offer based on their preliminary assessment of your situation.
It’s designed to give you an idea of what price they’re willing to offer before proceeding to the full application stage.
What does it tell me?
The business loan agreement is also known as a discussion paper, a 2-page document that typically outlines the following:
- The amount that you want to borrow: This includes the Loan to Value Ratio (LVR) of your business loan.
- Loan purpose: This could be anything from equipment finance and invoice discounting to capital funding to expand your business premises or to buy a new freehold property.
- Your security: This includes the director’s guarantee over the business assets and what residential property you’re using as security.
- Interest rate: This is the bank’s indicative rate offer.
- Fees: Some of these can be negotiated.
- Interest only period: Usually up to 5 years.
- Loan term: Typically based on the lease term in place for the business premises.
- Repayment schedule: This always negotiable.
- Name of guarantor: If applicable.
When do I receive the term sheet?
As mentioned previously, you will receive an initial offer in the form of the business loan term sheet prior to making an official application to the bank.
This is where a mortgage broker can help!
Typically the bank will want a rough estimate of the net operating income of the business, how much you’re borrowing and what the purpose of the business loan is.
In this way, the pricing gets negotiated upfront rather than going through the entire application process for an offer that the customer isn’t happy with.
A mortgage broker can collect this basic information on your behalf, present it to the right relationship manager at the bank and come back to you with the lender’s offer.
It’s at this point that you can either accept the offer or negotiate with the lender, which in most cases will be for a better interest rate or fee waivers.
How do I get a great deal?
The terms and interest rates for commercial and business loans aren’t black and white.
Almost everything is negotiable if you can present a strong case with the right lender!
How do I negotiate with the bank?
If you’re not happy with the initial offer from the bank, the bank may want to justify offering you a more competitive term sheet by seeing more of your business financials.
It helps if you have 2-3 years experience in running your business and can show that you’ve made you’ve tax and employee obligations on time. Any further accountant-certified balance sheets or profit and loss (P&L) statements that showcase the strength of your business will also help your case.
What else can I do?
You may want to provide them evidence of your repayment history for any home loans, personal loans or business finance that you currently have. Having a good repayment will give you more negotiation muscle.
Of course, the lower your LVR or the more of your residential property that you can put up as security for the loan, the more power you have in bargaining.
If it gets to the business application stage, you provide your financials and it’s found that you overestimated the turnover of your business, the bank may increase your interest rate.
What about reporting requirements?
Although most business loan applicants focus on wanting to get a cheap interest rate, they often overlook the covenant and annual review reporting requirements of the loan.
These reporting requirements relate to providing the bank with the financial position of your business via balance sheets as well as tax portals and business activity statements (BAS) that show that you’re meeting your employer and tax obligations.
These reporting requirements can be cumbersome, time-consuming and even cost you since you’ll have to hire an accountant to certify your books.
Generally speaking, if you’re borrowing under $1 million, you can avoid covenant and annual reporting altogether.
Even if you need to borrow over this amount, the reporting requirements can still be negotiated if you have strong business financials.
Fill in our free assessment form and let help you qualify for a competitively-priced business loan that fits your needs.
When can it be hard to negotiate?
That’s typically because there is an inherent risk with these types of businesses.
They can generally only operate on purpose-built premises and are more easily affected by the shifts in the economy and changes to legislation that can make it difficult to run a profitable business.
An example of this is the changes to lockout laws that affected a number of capital cities across Australia.
This has had a massive effect on the profitability of many pubs and clubs so many banks would be unwilling to shift on the terms and fees set out in the business loan agreement.
In fact, they might just decline your application due to decreased appetite for the industry than negotiate a better deal with you!
Not all lenders are the same!
Some lenders just don’t understand business customers and will really dig in their heels when it comes to budging on the business loan term sheet.
However, not all lenders are the equal and they all have different risk appetites.
Not all mortgage brokers are the same either!
We can help present your application in a positive light so it highlights your strengths as a business owner who is on top of their financial commitments including repayments.
Call us on 1300 889 743 or complete our free assessment form to discover how much we can save you on your business loan.
We’re business and commercial loan specialists!