Table of Contents
So, you are looking for a business loan, but slightly unhappy with the loan offer being made? You are not alone in this. Banks and NBFCs (non-banking financial companies) when lending out business loans, try to maximise their gains. What you need is to learn the tricks on how to negotiate a business loan with the lender. It’s a tactical process, where you need to get facts and details right, and establish yourself as a creditworthy borrower.
Remember, negotiation in business is an art. It requires a methodical approach based on details, so as to create a win-win scenario for all parties involved. As a borrower, if you are looking at taking a business loan for your MSME, here are some proven tips to enable you to negotiate better with banks on your loan offer.
1. Negotiate on the loan interest rate
While this may sound like a cliché, this is the first point of negotiation – the loan interest rate for your business.
The Reserve Bank of India (RBI) sets some guidelines that all banks and lenders have to abide by. However, there is scope to modify the interest rate marginally based on multiple factors. Considering that business loan interest rates across banks/NBFCs are not uniform, find lenders who offer loans at low interest rates. For instance:
MSME loan interest rates in India
Interest rate % p.a.
|State Bank of India (SBI) small business loan||9.65% onwards|
|Union Bank of India small business loan||9.05% onwards|
|HDFC Bank small business loan||15.75%|
|Tata Capital finance for small businesses||12% onwards|
Note: Interest rates are subject to change. Please check with the bank/NBFC on the current interest rates before application.
Knowing the different loan interest rates offered by different lender (e.g., fixed and floating interest rates), puts you in a better place to negotiate. So, shop around, compare loan interest rates, and then negotiate on the best rates. This will directly affect your monthly EMI payments – so invest some time here and choose well.
All lenders will request for KYC proof, documents, credit scores, collateral (optional) and offer a loan that keeps risk of non-repayment to the minimum. As such, it is better to know who is offering how much and at what rates, to negotiate and get the best deal out of it.
Remember, lenders are looking for borrowers as well. So, unless your loan eligibility is a complete miss, even lenders will be willing to negotiate and offer you loans with the best interest rates.
2. Understand additional charges to be paid
Processing fees, service charges, foreclosure charges, documentation fees, early repayment fees, statutory charges – these are some of the additional charges you have to keep in mind when borrowing a loan from a bank.
Some of the charges (e.g., stamp duty, statutory charges) cannot be lessened or waived. However, there is scope to negotiate on the fees the banks charge you. For instance, if you are taking a business loan with collateral security, the risks of non-repayment are significantly reduced, making it easier for you to negotiate the additional fees and charges asked for.
In every case remember that the better your personal and business records are, the higher your chances of negotiating term loans with banks and financial institutions.
3. Have a business plan ready
If you are looking for a short-term collateral free loan for a small amount (e.g., ₹20-50 lakhs), in most cases banks will not ask for a business plan. If you are looking at negotiating on the loan offer and interest rates, a well-prepared business plan comes handy.
A business plan is a document that outlines your business’s scope. It adds details to your product portfolio, market analysis, competition, customer profile, financial forecast, future roadmap, management team etc.
When you present a business plan with your business loan application, it gives the lender a thorough picture of how you aim to spend the borrowed amount, the risks and its solutions, and what are the returns expected over the period of time. It builds confidence in the lender assuring them that you will be able to repay the loan in time, as per terms agreed upon.
This is more for start-up loans for new businesses, as they do not have documents such as previous years P/L statement, bank statements, CA audited financial records etc.
4. Find the right lender
There are 33 nationalised banks in India – 12 are government banks and 21 are private sector banks. Apart from these, there are regional rural banks (RRBs), foreign banks, co-operative banks, small finance banks, and non-banking financial companies – all of whom offer small business loans to MSMEs.
In order to negotiate loans with banks, the first thing you have to do is identify the right lender. True, you will consider the basics such as interest rates, repayment terms, fees involved, loan amount sanctioned etc. But there are also other factors to consider.
For instance, there are lenders who offer special loan schemes for MSMEs only, there are lenders who have special loan schemes for women entrepreneurs, etc. Similarly, try to find lenders based on the type of business finance loans you are seeking (e.g., working capital loan, commercial vehicle loan, inventory loan etc.).
You should also consider the terms and conditions associated with the loan. There might be lenders who are offering better loan rates but have several terms associated with it. In such cases, read the loan documents, and evaluate what works in your favour. Some of the terms can often be negotiated, while the others are constant. Compare and find a lender that fits your business needs.
5. Be debt free
If you have an outstanding loan, clear it; if you have pending credit card bills, pay them; if you have multiple EMIs in your name (e.g., home loan, car loan, etc.) ensure you are making timely payment. In brief, keep your financials clean and stay debt free as far as possible.
Understand that when you seek a loan, the banks will try to keep their risks to the minimum. Your business’s financial records and your own personal creditworthiness will be taken into consideration. As such, the lesser debt you have, the higher your chances of having a favourable business loan negotiation.
As a simple checklist keep the following in mind:
- Try to maintain a personal credit score of 750+
- Ensure that not more than 35% of your incomes is paid as EMI or credit card bills
- Make it a point to pay all your bills on time
- Keep your business financials in check (e.g., business profitability records, balance sheets, etc.)
Also, as a pro tip for getting a business loan, keep tap of all your loans. Apply for a loan 3-6 months before your existing loans are closing. This will give your edge in your loan negotiation as you can prove that you have been paying all instalments in time and will soon be debt free.
6. Talk about collaterals
Offering a collateral with your loan application can be a big gamechanger. The moment banks understand that there is asset to be pledged as security, they feel secure to offer you finance.
Having an asset as security increases your scope of loan negotiations for business. Based on the value and type of asset pledged, you can negotiate on the loan amount, interest rates, tenure, repayment terms, and other details. There are pros and cons of pledging an asset:
Advantages of adding loan collateral
Disadvantages of adding loan collateral
|Lower interest rates and better loan repayment terms||Collateral stays mortgaged/blocked with lender till repayment|
|Higher loan amount approval (up to 70-80% of collateral value)||Collateral cannot be used for any other purpose than stated|
|Reduces risks for banks and ensures borrowers pay on time||Need to have a substantial collateral (often difficult for MSMEs) with authentic documentation|
When pledging an asset, a best practice is to offer business owned assets as collateral (as against personal assets). In certain cases, for instance when taking a commercial vehicle loan for instance, the asset i.e., vehicle is by default mortgaged with the bank/NBFC till repayment is complete.
7. Work on the negotiation plan
If you think you can work the loan negotiation in your favour without a plan, think again. Lenders are accustomed to offering loans every day, and they are familiar with all the different arguments you will put up. As such, don’t go for a loan negotiation discussion without a plan.
When working on your negotiation plan consider what factors are critical and needs to be adhered by. For instance, a lender might offer you ₹30 lakhs at 12% interest or ₹50 lakhs at 13% interest. In such a case, is it worthwhile to pay higher interest for higher loan amount? Or is a more conservative loan amount sufficient for you?
Another example would be to have a plan ready to negotiate on prepayment terms. It is possible that in time you will have access to enough funds to pay off the loan before time. Many lenders charge a fee for it, as the overall interest collected from you is now lesser than what would be if you pay the EMIs for the tenure. As a borrower ensure that you have a loan negotiation strategy in place for negotiating prepayment terms.
In brief, work on your negotiation plan. Consider your business’s strength and financial health, future projections, and negotiate.
Summing up: Next steps
As can be understood, the loan negotiation process is not one-sided. You have a need for funds, banks have the need to lend funds and earn interest out of it.
When banks seek your business’s financial history, they have two objectives:
- To understand your business’s earning history (i.e., whether it is a profit or loss making entity, fluctuations in revenue/income/losses)
- To predict its future potential (and risks)
As such, it is imperative that you have all your records in place to increase your negotiation power. Maintain a good credit score for borrowing a loan, plan and prepare your negotiation, and shop around till you find the right lender for your business.