If you haven’t refinanced or renegotiated your financing lately, now is the time. Interest rates are at historical lows. Here is how to get the funds you need at the best possible rate.
Get prepared – Rates are set based upon risk and competition. Despite some securitized lenders exiting the market, there is lively competition within non-securitized lenders for marketer business. Therefore, your main job in a financing request is to minimize the risk of your transaction in the lender’s mind. This means going beyond the usual company financial statement presentation. What can you give potential lenders to make them feel totally comfortable extending you cheap money?
Business plans – Think one year, five year and ten year. A lender likes a company with a plan. Remember you must execute, though!
Collateral – Petroleum-related dirt is risky. What else can you offer? Lenders like cash, rolling stock, marketable equipment.
Industry Data – provide industry data only if your company stacks up pretty well compared to the industry. Highlight specific ratios where your company exceeds the industry.
Know exactly what you want – Don’t depend upon lenders for loan and line structure. Decide in advance how much you want and how you want the lending mechanics to work. Then clearly communicate your expectations to potential lenders. Sure, they may come up with even better ideas, but start with what you know you want.
Exploit competition – In today’s volatile lending marketplace, it pays to have numerous lenders looking at your package. Consider a mix of traditional and non-traditional lenders including banks, leasing companies, supplier programs, government programs, and private funding sources. Although some of these lenders may only be able to take care of a portion of your needs, they may have terrific, cheap programs for a particular piece.
Avoid application fees – If a lender won’t complete their due diligence without an application fee from you, it’s best to walk away. It’s too easy for an unscrupulous lender to charge you an upfront fee and then decline your request. Most reputable lenders don’t require any money from you until both they and you are committed.
Get written proposals – It’s incredibly easy for lenders to verbally promise you the moon to woo you, then not produce. Ask for each lender’s proposal in writing, being very wary of lender “out” clauses. Some proposals are not worth even the paper they are printed on. If a proposal is contingent to any condition, get that condition clarified. For instance, a proposal may say that the loan will be subject to certain financial covenants without saying what those covenants are. Know all loan conditions in advance before accepting any proposal.
The lowest rate isn’t always the best deal – Because there is huge variance in loan costs, everything from documentation fees to legal fees to collateral evaluation and appraisals, you shouldn’t select a lender based purely on rate. Make sure you know ALL COSTS associated with each proposed financing. These costs can even include restrictions on deposits. At Meridian, we load these costs into a Net Present Value spreadsheet to compare loan offers. This lets you easily assess a low rate, high fee loan versus a higher rate with no fees. Using an NPV model always helps you with the correct decision.
Negotiate – By utilizing the best aspect of each proposal in your negotiations, you can negotiate the absolute best deal. Most lenders do not put their best offer on the table first thing out of the box. Meridian clients with really low loan rates often report the successful lender modified their proposal two or three times before they said “yes.”
It’s personal – Once you’ve narrowed the field of potential lenders, really take time to get to know each lender on a personal level. Go to lunch, go to ball games, get them in a relaxed setting where they are more inclined to “let their hair down.” A lender who likes you personally will be more inclined to go the extra mile. Plus, you may learn some interesting things about their institution that will help you decide if you want to do business.
Make any “no thank you” friendly – Once you’ve selected a final lender, get back with each lender who bid on your needs, show appreciation to them and keep that back door open. You never know when your primary lender might fall through! Make sure they understand why they did not get your business and what it would take in the future in case they want to come back to the table at a later date. Remember that most have invested lots of time and energy.
Read the fine print – We can’t tell you how many horror stories we hear at Meridian about final documents not matching lender verbal commitments at the twelth loan hour. The bottom line is that you must be willing to abide by and adher to whatever the loan documentation states. If your documents don’t reflect the terms the way you understand them, have the documents changed! Never sign loan documents unless you are in complete agreement with each and every word, paying special attention to covenant and default clauses.