Negotiation can be defined as a process involving two or more people of either equal or unequal power meeting to discuss shared and/or opposed interests in relation to a particular area of mutual concern. Negotiating a loan commitment and agreement can be a struggle for the energy entrepreneur. In most cases an entrepreneur will find that the financial institution has the money and therefore controls the negotiation process.
As an entrepreneur, your ability to obtain a loan on cost-effective terms that suit you will depend on your negotiating skills in the loan interview. If you fail to play well at this stage, lenders might take granted and charge you uncompetitive interest rate.
You should always remember that, negotiating the rates and terms of commercial loan financing is just as, if not more, important as negotiating the property’s purchase price. There are several ways to save when financing your commercial loan. One of the best ways is to find a trustworthy, reliable lender who knows you, your needs, and your goals. Having a solid relationship with your lender opens the door to multiple discounts and facilitates commercial loan financing negotiation.
Negotiations are based on the following:
- The amount that you are planning to borrow.
- The applicable interest rates.
- The maturity date of the loan.
- Any rights to extend the maturity date and the conditions for doing so.
- A description of the fees and their due dates. This includes fees and when the fees are deemed as earned.
- Financial agreements such as debt service coverage ratios, tangible net worth requirements, or capital expenditure limitations.
- Calculation of interest. On what basis will interest be calculated? For example, will it be based on a 365/6-day calendar year, a 360-day year of equal 30-day months, or some other methods?
- Collateral requirements – what kind of collateral requirements does the FI require- cash, chattels etc.?
- Guarantors-The nature, content, and scope of guarantees can only be touched on in this article. The borrower must understand, however, precisely what guarantees will be required and from whom.
In preparing to negotiate an entrepreneur should do the following:
Gain as much information about the financial institution and specific loan product prior to setting up a negotiation meeting.
- Consult as widely as possible with different people to get before meeting the financial institution.
- Try and build consensus while clearing defining what is and what is not negotiable. During negotiation, the entrepreneur should:
– Maintain a posture of flexibility
– Maintain open lines of communication, while avoiding looking nervous
– Be friendly and cooperative while negotiating
– Demonstrate understanding of the content being negotiated
– Be willing to explore a range of alternative possible outcomes
– Be as conciliatory as possible without compromising your position
5.4.4 Prompt loan repayment.
Loan repayment is what shows the health of a business at the time. Proper loan repayment is helpful as it adds credibility to the entrepreneur. The good will attained can be very helpful in future endeavors.
Advantages of prompt repayment:
- The entrepreneur can easily raise more resources. Financial institutions can lend an entrepreneur who pays well more money as they are deemed low-risk clients.
- Less stress for the client. The client will not be worried about the financial institution so they will run their business better.
- More trust. When an entrepreneur pays their loan very well, they attain a ‘good credit history’. This helps them when they want to borrow from any other bank or financial institution. They get better treatment and sometime better interest rates.
- Security of collateral: The entrepreneur has better security for their collateral when they pay their loan well. This can be very bad when the collateral is borrowed or when it is critical to the survival of the business
5.4.3 Assessing ability to pay a loan.
There is a close relationship between stock management and cash flow and eventually level of profitability. Tying too much cash in stocks may jeopardize the operations and cause unnecessary liquidity problem. It is helpful to predict the volume of each product to make/buy and sell each month. Buying the right stock quantity allows the business to make reasonable profits and release cash for other purposes like paying loan installment. The ability to pay is determined by mainly two things. Firstly, the ability to generate adequate cash flow at the end of the month or other agreed interval to pay the loan installment. Secondly, the ability to generate enough profit from the extra business associated with borrowed funds to cater for the interest expense as and when it is charged.