How can solo practitioners secure better terms on business loans? (Sponsored by Intervet/Schering-Plough Animal Health)
Providing a good explanation for your request and backing it up with a business plan is a good way to obtain favorable terms on a loan. You should also check your credit report to make sure it is favorable and indicates to the banker that you pay promptly on your debts. Depending on your loan request, your banker may look at the collateral you have to offer for the loan. Real estate offers the best collateral, while equipment is looked at as riskier and will raise the interest rate for your loan.
Another factor that will help you secure favorable terms is interviewing a minimum of four lenders and comparing their commitment letters. The terms and conditions in bank commitment letters are negotiable. If there are certain terms and conditions you do not like, ask the lender to change them. A condition to watch out for is a loan covenant. This is a condition put on your loan that requires you to provide the lender information on a regular basis or produce enough revenue on a regular basis (based upon what the lender considers a good standard). If you violate a loan covenant, the lender has the right to call your loan.Be sure to check if you can pay off your loan early without payment penalties (which can be very expensive). If you are considering leasing instead of financing, realize that the only payment option to terminate a lease early is to pay off the entire lease. Also, determine who will have to sign on the loan and provide loan guarantees.
Many times bankers will give you options about your loan repayment terms. Consider shorter-term loans for equipment, especially equipment that will become obsolete or the value of the equipment will decrease quickly. You may also be given rate options that are either variable or fixed. Many times if they are variable, they are tied to the prime rate and can change quickly. If you are risk adverse, consider a fixed rate loan. If you believe rates will fall over the life of your loan, stay variable. But if you think rates will rise, fix them now.
Gary Glassman, CPA