Securing favourable terms and conditions on a business loan is one of the best ways to enhance the cash flow and long-term profitability of your company. Whether you want to scale, manage cash flow or invest in new opportunities, strengthening your financial profile and exploring different loan options puts you in a position of greater leverage to secure better rates. In this article, we will outline effective strategies for negotiating better business loan interest rates and put your business in the right financial position.
Understand Your Creditworthiness
Before opting to apply for a loan, it is essential for the entrepreneur to understand their business’ creditworthiness. This is to be done to ensure that the plan to take up credit is in sync with the available credit in the market.
Credit Score
Credit score is one the most important factors that is taken into consideration by the lenders while assessing a loan application. Credit score acts as a window which helps the lenders look at the applicant’s creditworthiness and loan history. It shows any past defaults, repayment delays, number of accounts, etc. which enables the lender to make informed decisions based on the applicant’s credit history.
Be it an individual or a business, it is imperative to make decisions which will reflect positively on the credit score. A few practices that can be followed are – Avoiding credit defaults, making repayment on time as per schedule, keeping credit utilization low (Under 30% is recommended), having a long standing credit relationship with a lender, among other practices.
Business Financials
For a business opting for a credit facility, financials are given a very high importance. Business financials indicate a company’s financial health. One may wonder why it is important? – The reason being it helps the lenders assess whether the company has enough financial resources and liquidity to support the repayment of the loan. Strong business financials are instrumental in securing low interest loans, or loans with favourable terms.
Entrepreneurs should provide verifiable, trustworthy, comparable, and audited financial statements to the lender to ensure trustworthiness in the application, and faster assessment
Debt to Income Ratio
This is probably the most important liquidity ratio which is taken into consideration when making an assessment for a loan application. It indicates the amount of debt the company is carrying in proportion to its income. A company with high debt to Income ratio indicates high leverage. Such companies may have some difficulties in repayment of the loan/ As an entrepreneur it is important to keep this ratio under control. As the lenders would make an assessment of the same, and would prefer releasing loans to the companies with low debt to income ratio, as it indicates easier debt serviceability, and low risk
Industry Considerations
Businesses in some industries are more cash heavy than others, hence such industries require higher credit in comparison. It is essential for an entrepreneur to take industry into consideration, and look at comparable businesses. There might be some incentives available in the market which can be utilized by the entrepreneur.
Research the Loan Market
Now that the entrepreneurs have a clear understanding of their creditworthiness, it is also important to research the loan market before applying for a loan. As doing so may help in securing loan on less interest and at favourable terms and conditions.
Loan Type
Considering the fact that the debt requirement has risen in the economy, this has led to an increase in the types of loan product offering. It is imperative to check what are the loan products on offer in the market, and which product best suits your requirement. Choosing the correct loan product may help you save a massive amount of money on interest payment, and also offer convenience regarding other debt terms.
Compare Lenders
Since there is a flurry of lenders in the market offering comparable products, there has been a boost in the confusion regarding which lender to go ahead with for your loan requirement. For this the applicant needs to make an assessment of the suitability. The applicant should compare lenders based on multiple parameters which are important from a loan perspective like loan interest rate, repayment schedule, prepayment charges, foreclosure charges, penalties in case of delayed payments, among many other factors.
Current Market Trends
Before making any decision, it is imperative to understand the current market trends to come to a suitable conclusion to get a loan product, and which one. Also if there is an expected upcoming rate cut by the reserve bank, etc. It is important to take these factors into consideration as these might have cost implications.
Non-Traditional Lenders
Gone are the days when debt could only be given by either private local lenders or institutional banks. Considering the current market scenario, there are many private players that have come to the foray offering different types of low cost loans with extremely attractive terms and interest rates.
The business can reach out to these new age non-traditional lenders like LendingKart to check the product offerings, as these lenders may be offering lower interest rates and suitable terms.
Strengthen Your Business’ Financial Profile
A business’ financial profile plays a pivotal role in securing loans from the lending institutions. A strong financial profile indicates the business’ capability to repay the loan, and vice versa, hence it could be a deciding factor for a lender to disburse the loan or not.
There are certain measures that can be taken by a company or an entrepreneur to enhance the business’ financial profile, hence enabling it to secure better lending terms and interest rates.
Business Plan
A business plan indicates the entrepreneurs or the management’s short and long term goals and the steps the company will be taking to achieve the same. For lenders, this clarity is important as it helps them to understand how the company will utilize the debt funds and its capacity to repay the loan over the repayment tenure.
A business plan is instrumental in strengthening your case, and would help secure favourable lending terms and conditions. Hence, while creating an application, the business should also submit their business plan highlighting plans for both short and long term, and how the funds will be utilized.
Business Financials
Financials give a clear picture of the business’ capability to repay the loans, and how efficiently does the business use its capital. It is one of the most important and reliable indicators that the lenders leverage to assess the debt taking capacity of a business. Hence, it is imperative that the business have strong financials in place which will help secure
Collateral or Personal Guarantee
Higher the risks means higher the rewards, however the lending institutions take certain measures to balance these risks. This can be in the form of higher interest rates, collateral or guarantees. In case of loans, to cover the risks of default, a lending institution may ask for a collateral which can be liquidated to recover any dues in an event of a default, Personal Guarantees also play a similar role – In case of non repayment by the business, a personal guarantee given by an individual gives the lending institutions rights to recover the outstanding from that individual.
To secure a loan at favourable terms, or to negotiate rate of interest, the entrepreneur can offer a collateral to the lender to cover their risk, thus decreasing the rate of interest.
Negotiating The Loan Terms
Like any other business transaction and relationship, it is essential for an entrepreneur to also negotiate loan terms to ensure that they’re able to secure the best possible deal for the loan.
Following are some points which can be taken into consideration while negotiating the loan terms with the lenders:
Compare and present the available loan terms
Before taking a loan, it would be a smarter idea to check what are the terms and interest rates on offer by various lenders. This will help you compare and come to a conclusion which lender is giving you the best deal. You can then negotiate on the finer clauses like penalty charges, credit period, interest rates, etc. with the lenders by giving them a reference on what you are being offered, thus enabling you to reduce interest rate and secure the best deal possible.
Ask for rate Reductions or Discounts
Interest rates are a component with the biggest impact on the cost of loan. You can negotiate with the representative on the offered interest rate or simply write to the lender or the bank for a rate reduction. One can download a sample letter to bank requesting reduced interest rate from the internet.
Consider Fixed vs Variable Rates
Fixed interest rate is when the rate of interest is fixed throughout the loan tenure, and variable interest rates is when the interest rate varies as per changing bank rate throughout the loan tenure. Since these both are highly dependent upon factors such as loan amount, tenure, rates being offered, etc. You may weigh the pros and cons of both and choose the one which most suits your business.
