How to Negotiate a Business Loan Term Sheet
While a loan term sheet is a non-binding outline of the loan's conditions, it represents the best opportunity to maximize the borrower's interests in the final loan agreement. The lender uses the term sheet to secure the approval of the lending committee. Any subsequent changes need to be analyzed and may require reapproval by the lending committee.
Whether you are negotiating on your own behalf or using a loan broker, identifying your strengths, goals and priorities will maximize the results.
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Things You'll Need
- Historical financial statements
- Financial projections
- Business objectives
Instructions
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Strengths and Priorities
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List your financial strengths. This includes your collateral, your business (in terms of cash flow and net assets) and your and the other owners' personal financial strengths. You should also assess the near and long-term strength of the market in which you operate.
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Prioritize loan terms and conditions. A loan is made up of multiple terms (interest rate, duration, security, prepayment, etc.). A bank may be willing to reduce the interest rate if the duration is reduced, more collateral is provided or you personally guarantee the debt. While you may desire a lower rate, you may not want to put your personal assets at risk. A priority list will identify your top objectives and what you are willing to sacrifice to achieve those objectives.
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List your near-term and long-term business objectives. The bank is focused on the loan repayment, regardless of the business' success. A well-designed term sheet will protect its interest while maintaining your freedom to pursue your business objectives.
Term Sheet Analysis
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Analyze loan covenants (ratios and restrictions) against your business objectives. Do they conflict with your objectives? For example, does the bank restrict acquisitions when this is how you intend to grow your business? Are the ratios a relevant measure of business success or the ability to repay the debt? Are they easy to measure?
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Calculate default limits on ratios. A default limit is the amount you change a ratio before you are in default. For example, a term sheet may require a current ratio (current assets divided by current liabilities) that is at least 1.4:1. If your current assets are $375, 000 and your current liabilities are $215,000, then your current ratio is 1.75:1. Your default limit for adding short-term debt (current liability) is $52,857 ($375,000 divided by 1.4; and $215,000 subtracted from this result). You could add up to $52,857 in short-term debt, if you kept the same level of current assets. If this is less than your business may need, you will need to ask for a lower ratio.
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Review reporting and other requirements. Can you complete the required financial statements in the time required? If not, you should explain why and ask for more time. If the term sheet includes insurance requirements, these should be reviewed with your insurance broker. You also need to have all business licenses in place and taxes paid.
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Tips & Warnings
You should allow at least three months before you need the financing to start the process. Ask for a commitment letter, including a term sheet, from three lenders. Start with the bank handling your current bank activity, or your personal bank, if this is a new venture.
References
Resources
- Photo Credit Group of business people working together in the office. image by Andrey Kiselev from Fotolia.com
