Thinking about starting a business and need some capital to get things going? You are not alone. Financial roadblocks are a major problem for people with great ideas and no resources to bring them to life. Rather than sit on your hands and wonder when you’ll win the lottery, consider certain negotiation techniques to get a better rate for a business loan and make your dreams a reality.
Start your financial search by looking outside your existing bank. While it might seem logical to bank with a branch you are familiar with, you might be able to get a better loan rate by taking your business somewhere else. Banks are desperate for long-term clients and if they think they can make money from your lending, they are more apt to offer you funds. This works to your advantage. You can also shop around for rates. Even a fraction of a percentage point on a business loan can provide a much-needed cushion for you as you get started, and some financial lending institutions might also consider deferring payments for a few months to help you curb the cost of startup.
Keep in mind, the bigger banks are not always in a position to do such lending. You might be surprised to find that smaller, private banks are more open to negotiating terms. Bigger banks get their rates from the long arm of the lending law, while smaller banks, including community credit unions and micro-lending establishments are more likely to offer you terms that you can live with and that won’t leave you feeling high and dry when the payments come due.
Another way to approach getting a better rate on your business loan is to be willing to put up some capital yourself. If you are able, a little cash can go a long way in slashing loan rates and providing you with more wiggle room in your ask. If you’ve received any capital investment, consider leveraging those funds to build your case at the local bank. After all, if your business idea is worth investing in, you might find the banks are little more open to doing business with you.
If you have no money and no credit, you might be able to get a better loan rate by having cosigner. A cosigner is someone who offers up guarantee that you’ll make good on your loan payments. Typically, a cosigner is someone with a steady job or a certain level of demonstrated wealth. Another business owner who is just starting out is not the ideal cosigner. Most business owners, or aspiring business owners turn to their family members for help in this area, but you could also turn to businesses that might benefit from your new idea, or ask for investment for shares, rather than a loan, per se.
If you are a homeowner or have any equity in your home, consider taking out a non-business loan, such as borrowing against the equity in your home, to get the funds you need. While this is risky for some people, it might be the only way to get the cash you need, so consider it carefully. What’s more, this is a great way to get capital startup costs that you can use against a loan application that doesn’t require you to give up shares in your company or look for outside investment. Business owners are not risk averse, so this one might seem more comfortable to you than reaching out to family to ask them to bet on you.
Other ways to reduce the rate you qualify for on your business loan is to have great credit. Good credit can get you so far, but great credit that you can apply to your business is often necessary. If you are registering your business as a proprietorship, this method will be more effective than if you are setting up a corporation that has not credit history and is not legally tired to you as the owner. Speaking to your lawyer or financial advisor might be able to shed some light on options for registering your business to make the most of your banking options.
Speaking of financial advice, if you have personal funds that you have been saving for retirement, consider tapping into that account and using some – or all – of the funds to get a down payment on a loan for a building, infrastructure, or hiring. It’s not ideal, but it does keep you out of the doghouse when it comes to loans. Again, it might be a good idea to speak to your financial advisor about the benefits and risks of using personal savings to fund your business. It might be cheaper to just take a higher interest rate on a business loan than it is to pay a high fee for withdrawing retirement funds. But the option is there.
Finally, consider bringing on a partner who will own a portion of the business with you and who can put up some operating capital to get you started. Two names on a loan application are stronger than one, but keep in mind that your business partner might have terrible credit, which puts all the burden back on you. Because everyone’s financial situation is different, and because each bank doesn’t always offer the same products, you might want to shop around on both interest rates and business partners, if applicable. Pay attention to terms, length of contract, and payment schedules and be sure that you can pay the loan, or the interest payments at least, for the time being. Know what you are getting into ahead of time and you won’t get caught wondering where all your money went and why you are left with a big bill each month because it happens more than people would like to admit.