June 13, 2024

How to Negotiate Better Business Loan Terms


  • Business Finances

  • Small Business Loans

If you're a small business owner looking for funding like a business loan or business line of credit, you may have questions about loan terms, how they might affect your monthly payments, and if there's any way to negotiate better loan terms when working with an alternative or traditional lender.

The good news is small businesses generally can negotiate better loan terms for their small business loans. Though loan options like SBA loans provided through a Small Business Administration-approved lender may be less flexible and have more stringent requirements or restrictions on how you can spend the funding you receive, other loan types generally have some room for adjustment.

You can work with your lender to modify your repayment terms and other details of your funding, securing a better business loan and the cash flow you need in a way that will be most cost-effective for your business.

Keep reading for important information about negotiating the terms of your business financing, a closer look at how term loans work, and tips on negotiating small business loan terms that best fit your working capital needs.

What Is a Business Term Loan?

This type of financing option is provided to small business owners seeking lump-sum financing. Essentially, you'll receive a loan amount that you'll be required to repay in a set term. Some business owners seek shorter terms on business funding so that they can repay their balance quickly.

However, other business owners prefer long-term loans, which they can repay over several years. Either option is likely to affect details like your business loan rate and may come with additional fees. Here's a closer look at some specific loan terms that business owners can attempt to negotiate.

Business Loan Terms You Can Negotiate

There are several business loan terms that you may be able to negotiate, including:

  • Interest Rate: Believe it or not, you can negotiate your business loan rates and secure lower interest on loans or lines of business credit. This can potentially save you thousands of dollars over the life of your term loan, which can show up on your credit report and have a positive impact on your overall credit history. Just as with business or personal credit cards or personal loans, borrowers with a higher credit score are more likely to land lower interest rates.

  • Prepayment Terms: Some lenders charge a prepayment penalty for borrowers who repay their loans early. If you have plans to pay off funding used for equipment financing or a working capital loan before the term is up, you can negotiate a smaller fee or no fee.

  • Repayment Fees: In addition to details like the APR of your business loan, take a close look at the fine print behind your repayment terms. You may be able to negotiate fees like the origination fee or processing fee, which may make it more expensive or take longer for you to pay off your loan.

  • Personal Guarantees: Some business lenders require that you personally guarantee that you'll repay the loan with your personal assets if necessary. Borrowers with bad credit or startups with a limited business credit history may more commonly encounter a personal guarantee request. This can also happen if you maintain a high balance on a business credit card, have significant personal credit card debt, have recently taken out a home loan, or have some other factor in your credit history that may indicate you could be a credit risk. You may be able to address the personal guarantee while you negotiate your loan terms.

Keep in mind that large, well-known banks are usually less likely to budge on loan terms. They have very strict lending processes that they must follow. Due to this, conventional bank loans aren't always the easiest to qualify for, and negotiating is usually out of the question, too.

Online banking lenders may be more open to negotiating loan terms, as digital banking has created more of a competitive market for small business loans in recent years. While the vast majority of online lenders are trustworthy, it's always a good idea to check out their Better Business Bureau rating to be sure you're dealing with a reputable lender.

Credit unions can also be a bit more flexible when it comes to their loan terms. If you're a member of one, you may have more success negotiating with them than a bank, especially if you've used their products and services for a while. Online lenders tend to have the most flexibility, making them a great place to go if you'd like to negotiate loan terms.

8 Ways to Negotiate Loan Terms

At first, negotiating loan terms may seem like a daunting, time-consuming process. If you do this strategically, however, it may be well worth it. Below are some tips for negotiating small business loan terms. By following them, you can increase your chances of securing the business term loan amount that you desire.

1. Know Where You Stand

Check your credit score as well as the lender's requirements to get an idea of where you stand. If you meet (or exceed) their requirements, you'll be in a much better position to negotiate than if your credit score falls short of their average.

2. Learn About the Lender

It's important to know your audience prior to negotiating and understand exactly who your lender is. Your negotiating options will vary depending on whether the business lender is a large bank, credit union, online lender, or other financing provider.

We suggest reading reviews about your lender to determine what types of borrowers they generally lend to. In fact, you may even find some negotiation tips from former borrowers.

3. Get to Know the Terminology

Before you negotiate with a lender, make sure you understand the terminology in your loan contract. Become familiar with terms such as loan-to-value ratio, balloon payment, and personal guarantee. If you're unsure of what something means, research to find out. Lenders are more likely to take you seriously if you make sense when you speak to them.

4. Take Advantage of an Existing Lender Relationship

If you've worked with a lender before in your personal or professional life, let them know. Lenders value long-term relationships and may be more likely to honor your request if they know you're a loyal customer.

5. Offer to Put Up Collateral

One way to show the lender you're serious about paying them back and worth negotiating for is to put up collateral, which is an asset you own. This may be equipment or a commercial vehicle. If you default on your loan, they'll have the right to repossess your collateral.

6. Be Clear and Polite

When you negotiate, be sure to treat the customer service representative with respect. Clearly convey what you'd like to negotiate and avoid defensive remarks.

7. Ensure That Your Loan Application Is Strong

A strong application can do wonders for your negotiation strategy. A higher credit score, larger down payment (if one is required), lower monthly debts, and a well-written business plan all show that you've done your due diligence in preparing your business for success. If you can wait for the funds, don't apply for a loan until you're confident your application is as attractive as it can possibly be.

8. Try Contacting Multiple Lenders

If you're unsuccessful with one lender, don't give up; instead, reach out to another lender to negotiate their terms. Remember that all lenders aren't created equal; you may qualify for financing from another lender.

Conclusion: Save Money by Negotiating Business Loan Terms

It's all too easy to simply accept a loan offer as is, but you may not receive the best deal possible. By negotiating it, however, you can save thousands of dollars over the life of your loan. While there's no guarantee you'll be successful, using the tips above can boost your chances.

Since 2008, Fora Financial has distributed $4 billion to 55,000 businesses. Click here or call (877) 419-3568 for more information on how Fora Financial's working capital solutions can help your business thrive.