How to Negotiate Better Terms for your MSME Loan

Synopsis: MSMEs significantly contribute to India’s GDP growth. However, when it comes to seeking financial aid, they face challenges in securing a loan at better terms due to a lack of proper negotiation tactics. Read this article to discover key negotiation strategies to ensure better MSME loans.

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In recent years, the MSME sector has become India's economic growth powerhouse. As per a recent report, MSMEs contribute nearly 30% to the national GDP, which shows their vital role in our economy. But, when these small businesses need a financial boost, getting a loan can be tricky. They aim to generate revenue for business expansion while ensuring minimal expenditure to optimize financial efficiency. That's where the art of negotiation comes in. This article outlines some simple yet powerful tips to help you talk to loan providers and get a deal that's just right for your business. Let's dive deeper!

7 Tips to Negotiate Better Terms for MSME Business Loan

Analyze Risk Profile

If you can make the lender understand the level of risk involved with your business profile, you can negotiate better terms. First, you must prepare a detailed business plan about your goals, business strategy, and loan requirements for growth and expansion. Also, help your lender acknowledge the internal and external risks associated with the deal. It will portray your image as a responsible beneficiary and enable you to negotiate better terms.

Prepare Your Pitch

Financial partnerships with your lenders should not transfer control of your business decisions to their hands under any unfortunate circumstances in the future. That usually happens when lenders try to influence business decisions to expedite their money quickly from the market before the company tanks. So, prepare your pitch to clearly outline all non-negotiable and negotiable components of the financial arrangement to the lender. This will help you take control over projecting your terms for negotiations better.

Choose the best loan option.

Different types of business loans depend on whether you need them for capital investments or short-term goals. Choose an overdraft facility, security loan, or bill discounting if you require a capital loan. On the other hand, an unsecured business loan will suffice for your short-term goals, which come with a repayment period of up to 48 months.

Reduce Current Debt Levels

Focus on clearing your debts to secure a business loan on favorable terms. One of the best thumb rules is to ensure your current EMI commitments are at most 30% of your total income. This 30% threshold is a critical benchmark as it shows your creditworthiness and financial stability in the eyes of lenders. To bring your EMIs within this desirable range, you can try various tricks like opting for consolidated debts, paying off high-interest debts first, or improving income streams to lower your debt-to-income ratio.

Go for Existing Banks to Avoid Collateral Requirements

If you already have an established relationship with a bank, you should opt for loans from them rather than approaching a new lender. New lenders may require substantial collateral to mitigate loan risk. In contrast, based on your repayment history, your current bank may waive or reduce collateral requirements. Engage your current bank, emphasizing your longstanding business partnership and highlighting your consistent management of accounts and financial commitments, to foster a win-win situation for both parties.?

Negotiate to Waive or Reduce Loan-Related Fees for Better Terms

A business loan often involves ancillary fees associated with the loan process. These fees include documentation, processing, stamp duty, etc. They can increase the overall cost of the loan. However, with a robust credit history and a strong rapport with your lender, you may negotiate a partial reduction or potentially secure a complete waiver. While discussing the possibility of fee waivers, use information about competing lenders to your advantage. While your aim should be to get a complete waiver, be prepared to negotiate and find a middle ground acceptable to both parties.

Selecting an Industry-Specific Lender for Optimal Loan Terms

It is also imperative to seek out lenders with loan products designed specifically for your industry. Such lenders have a deeper understanding of your industry market dynamics, risks, and opportunities and thus offer more favorable terms. For instance, you can expect to negotiate flexible payment schedules per seasonal cash flow variations or specialized lines of credit per your specific industry norms. Conduct your research or leverage industry associations and networks to get recommendations for specialized lenders. Prepare a strong business case with a list of potential lenders once ready. Highlight how your business stands out in the market and showcase how often you will use the loan amount to capitalize on specific industry opportunities.

End Thoughts

Securing a favorable loan agreement requires negotiation and strategic decision-making with an ideal lending partner. In this regard, maintain minimal debt, choose a bank favorable to your business, and confidently negotiate improved terms, such as reduced fees. Applying these insights can help you foster business through advantageous loan conditions. Read this guide to further learn how Fintechs aid MSMEs overcome creditworthiness challenges.