When it comes to loans, there is really only one principal to remember that keeps the industry going. The bank has the money that you need. That is especially true if you are a small business looking to get started or get the boost that you need.
Simple enough, right?
However negotiating a loan that makes sense for you and the bank can be an uphill battle, and one of the main reasons for that are the conditions that are tied in with most loan agreements.
The good news is that if you enter the loan process thinking like a banker would and have some strategy in mind, you can find a way to work out conditions that make sense for you.
Lots of Loans to Choose From
One of the big advantages that you have as a consumer is that there is a vast array of institutions, lenders, and banks that will offer out term loans. While your goal is always to get the biggest loan at the lowest rate, it is not always an easy goal to achieve but is made easier when you understand what all of the competition offers.
The more research that you do on each lender, the more you will end up benefiting. While no one should think that they will always be able to get the bank to agree to all of their terms, the more work you put into it, the better.
What is a Term Loan?
Term loans are the type of loans that are most often used for long term assets. They are given out based on potential earnings in the future and are usually paid back with cash flow that comes in later on. Thus, a term loan is often based on the forecast of a business and what it has done financially in the past.
Banks are more concerned with cash flow than anything else, and they will focus in on future risks that may affect the business. That means that business owners have to be prepared to discuss their entire industry and how it will change over time. For instance, at this moment in time, it can be quite difficult to get a term loan if you are involved in the automotive industry but actually much easier if you are a business that works within the green industries.
How to Negotiate a Term Loan
Business owners should be prepared to talk about any of the risks that are involved in their current industry and be ready to ward off any fears and concerns that the bank may have. On top of that, it is important to know that while the term loan will help you in the future, the bank will also want to talk about and look into what other financial needs you may have in the future. If they determine that you might need more help later on, it may put a damper on the cash flow that you receive in the present.
On top of looking to the future, the bank or lender will want to talk about the money that has come in so far. If you can show proof of decent profits and a large number of sales in years past, then you may be able to avoid a lot of the complicating conditions that can come up with these loans.
On top of everything else, it is common for your balance sheet to come into question. If there are any weak spots in the sheet, then you should be prepared to point them out and offer explanation. The lender will be focusing on certain ratios involved with the balance sheets, and these are what you need to familiarize yourself with most. This will usually include operating ratios, fixed ratios, liquidity ratios, and fixed asset coverage ratios.
In the end, it is important to remember that most finance firms and banks have similar models that they use when negotiating term loans. There model revolves around the past, present, and the future and analysis of financial statements and the industry on the whole.
The more of these metrics and measurements that you the business owner understand, the better prepared you will be to get the terms and capital that your business needs.