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| "I drive hard bargain with lenders! – upside and downside of hard-bargaining…" |
| Copyright © 2005-2008. D. Neil Berdiev. All rights reserved. |
| Resources |
I was recently chatting with a business owner who has been in
business for close to two decades. Our conversation touched upon
the intense competition among commercial lenders and how that
businessman has benefited from the industry trends. He indicated
that whether it is a deposit or loan product, he always does his
best to get the best pricing, never accepts pricing he is first given,
and never takes “no” for an answer. Furthermore, if he does not
get the best price from his existing lending institution, he does not
hesitate to put his business on the market to seek a new lender.
This conversation has led me to think that many business owners
do just that; however, many do not act in the best interest of their
companies searching for that “best” price. So what is the best price
and how hard should you push the envelope?
What is the best price for your loan, deposit, and other
relationships?
For some business owners the best price is the lowest price, while
for others it is a competitive price for what they get. Take a look at
the diagram below. This is what I would call the best price – it is a
balance between certain price and the level of service you receive.
You can’t have it all (the best possible service at the lowest
possible price). If some lender tries to persuade you otherwise,
turn around and walk away – it’s a lie. Ask yourself what is
important and most beneficial to your company. Where would you
position yourself on the above chart? Then, build your lender
search and negotiations based on your expectation for pricing and
quality of service.
You should know that banking services have been so
commoditized over the last one to two decades that most
commercial banks already offer competitive price. How do they
determine that price? They evaluate various services you are likely
to use when you become their customer (deposits, loans, cash
management, credit cards, etc.). This is how commercial banks
generate revenue. Then they subtract the cost of providing those
services to you, including cost of staff and other overhead. The
difference is the profit a commercial bank expects to make on your
relationship. Not every small business owner views it that way, but
commercial banks are also businesses and strive to be as profitable
as possible, just as you do.
If all you care is the lowest bid, you are likely to get what you pay
for. If a particular bank considerably undercuts its competitors, try
to understand why. If the price seems to too good to be true, it
probably is. I have worked with a number of business prospects
who have decided to take their business to a competing bank due
to some savings just to later realize that lower price meant lower
service and quality. Also remember that if a particular lending
institution significantly undercuts its competition on loan rate, it will
find a way to make money somewhere else (e.g. higher deposit or
credit card processing fees).
A little tip: if you decide to go with one commercial lender, do not
burn bridges with the others in the process. You may end up
looking to come back…
How hard should you push in getting the best combination of
price and service?
I spoke with a chief lending officer of a Massachusetts bank a few
months ago, and he told me about his prospective customer. That
business owner was playing several competing commercial lenders
against each other trying to squeeze the lowest loan pricing. After
lengthy negotiations that lending officer decided to pass on the
business opportunity as the pricing the businessman wanted was
unprofitable to the bank. The business owner has pushed too far.
Interestingly, as soon as that bank dropped out of the chase, the
business owner came back to tell the chief lending officer that he
liked the bank and was content with the pricing last offered to him.
Nonetheless, the lender did not change his mind and said that he
was not interested. You may ask why? Commercial banks may
seem so desperate to find qualified loan candidates that this does
not sound like a prudent decision. The answer is simple. The chief
lending officer and his bank were looking for business borrowers
who understood that the bank also needed to be profitable to stay
in business. The bank was also looking for long-term relationships.
Given the entire negotiation, the business owner did not seem to be
interested in a relationship but rather the lowest price. Chances are
this customer will be gone to a competitor if lower price was
offered.
Unless your business and/or you personally are likely to become
an extremely profitable relationship for a commercial bank, nobody
is going to offer you the best possible deal upfront. Why? Ask
yourself if you offer your best deal to every customer. Commercial
banks are also businesses and have to be run profitably to continue
servicing their customers. However, you should not automatically
assume that you have been offered the worst price.
Hypercompetitive environment ensures that most offers you will
receive are fairly close to each other.
Once you have several offers, take your time to assess each one.
For instance, commercial bank A may offer you a Prime rate on a
line of credit, while its competitor bank B Prime plus 1%.
However, bank B may charge you only $1,000 loan fee, while
bank A $5,000. If bank B will assign a dedicated loan officer to
your relationship, this arrangement may be worth paying higher
price. In addition, if Bank A does not have a very good customer
service reputation, bank B may be a more attractive choice. As
you will notice when prospecting lending institution, and perhaps
you have already figured that out, it is only natural to take the
cheapest deal if you do not expect any problems with your bank.
Unfortunately, problems and various special situations arise in the
course of business and having a flexible, responsible, and quick-to-
fix-the-problem bank may be worth an extra expense.
It is expected in most cases to come back to a lender and ask for
a better proposal. The most you have to lose is to face a rejection,
but the original proposal is still likely to be on the table. However,
this is your opportunity to show that you can be a diplomatic,
persuasive, and reasonable business owner. Saying that you won’t
take the deal and want a better price won’t work in most
situations. Think of your own customers demanding lower price
just because they want it. In many case you will probably say no.
The best way to approach your negotiations with lenders is by
putting yourself in their shoes and negotiating the way you’d like to
be negotiated with. Assess what products and services you will use
and what value you will bring to that particular lending institution. It
also helps if your relationship is likely to grow and become even
more profitable as your business grows. There is nothing wrong
with mentioning the pricing offered by that bank’s competitors but
use it as one of several negotiating points. Just demanding lower
price because competitors offer it is a pretty bad way to negotiate,
the way that fails to build a healthy business relationship.
There is no right or wrong in how you bargain to get the best deal
for your business. However, learn to be a good negotiator. At
some point you will have to take the deal you have been offered.
So take the one you like the most knowing that you have done the
best you can to secure it and build the best possible relationship
with your lender.
business for close to two decades. Our conversation touched upon
the intense competition among commercial lenders and how that
businessman has benefited from the industry trends. He indicated
that whether it is a deposit or loan product, he always does his
best to get the best pricing, never accepts pricing he is first given,
and never takes “no” for an answer. Furthermore, if he does not
get the best price from his existing lending institution, he does not
hesitate to put his business on the market to seek a new lender.
This conversation has led me to think that many business owners
do just that; however, many do not act in the best interest of their
companies searching for that “best” price. So what is the best price
and how hard should you push the envelope?
What is the best price for your loan, deposit, and other
relationships?
For some business owners the best price is the lowest price, while
for others it is a competitive price for what they get. Take a look at
the diagram below. This is what I would call the best price – it is a
balance between certain price and the level of service you receive.
You can’t have it all (the best possible service at the lowest
possible price). If some lender tries to persuade you otherwise,
turn around and walk away – it’s a lie. Ask yourself what is
important and most beneficial to your company. Where would you
position yourself on the above chart? Then, build your lender
search and negotiations based on your expectation for pricing and
quality of service.
You should know that banking services have been so
commoditized over the last one to two decades that most
commercial banks already offer competitive price. How do they
determine that price? They evaluate various services you are likely
to use when you become their customer (deposits, loans, cash
management, credit cards, etc.). This is how commercial banks
generate revenue. Then they subtract the cost of providing those
services to you, including cost of staff and other overhead. The
difference is the profit a commercial bank expects to make on your
relationship. Not every small business owner views it that way, but
commercial banks are also businesses and strive to be as profitable
as possible, just as you do.
If all you care is the lowest bid, you are likely to get what you pay
for. If a particular bank considerably undercuts its competitors, try
to understand why. If the price seems to too good to be true, it
probably is. I have worked with a number of business prospects
who have decided to take their business to a competing bank due
to some savings just to later realize that lower price meant lower
service and quality. Also remember that if a particular lending
institution significantly undercuts its competition on loan rate, it will
find a way to make money somewhere else (e.g. higher deposit or
credit card processing fees).
A little tip: if you decide to go with one commercial lender, do not
burn bridges with the others in the process. You may end up
looking to come back…
How hard should you push in getting the best combination of
price and service?
I spoke with a chief lending officer of a Massachusetts bank a few
months ago, and he told me about his prospective customer. That
business owner was playing several competing commercial lenders
against each other trying to squeeze the lowest loan pricing. After
lengthy negotiations that lending officer decided to pass on the
business opportunity as the pricing the businessman wanted was
unprofitable to the bank. The business owner has pushed too far.
Interestingly, as soon as that bank dropped out of the chase, the
business owner came back to tell the chief lending officer that he
liked the bank and was content with the pricing last offered to him.
Nonetheless, the lender did not change his mind and said that he
was not interested. You may ask why? Commercial banks may
seem so desperate to find qualified loan candidates that this does
not sound like a prudent decision. The answer is simple. The chief
lending officer and his bank were looking for business borrowers
who understood that the bank also needed to be profitable to stay
in business. The bank was also looking for long-term relationships.
Given the entire negotiation, the business owner did not seem to be
interested in a relationship but rather the lowest price. Chances are
this customer will be gone to a competitor if lower price was
offered.
Unless your business and/or you personally are likely to become
an extremely profitable relationship for a commercial bank, nobody
is going to offer you the best possible deal upfront. Why? Ask
yourself if you offer your best deal to every customer. Commercial
banks are also businesses and have to be run profitably to continue
servicing their customers. However, you should not automatically
assume that you have been offered the worst price.
Hypercompetitive environment ensures that most offers you will
receive are fairly close to each other.
Once you have several offers, take your time to assess each one.
For instance, commercial bank A may offer you a Prime rate on a
line of credit, while its competitor bank B Prime plus 1%.
However, bank B may charge you only $1,000 loan fee, while
bank A $5,000. If bank B will assign a dedicated loan officer to
your relationship, this arrangement may be worth paying higher
price. In addition, if Bank A does not have a very good customer
service reputation, bank B may be a more attractive choice. As
you will notice when prospecting lending institution, and perhaps
you have already figured that out, it is only natural to take the
cheapest deal if you do not expect any problems with your bank.
Unfortunately, problems and various special situations arise in the
course of business and having a flexible, responsible, and quick-to-
fix-the-problem bank may be worth an extra expense.
It is expected in most cases to come back to a lender and ask for
a better proposal. The most you have to lose is to face a rejection,
but the original proposal is still likely to be on the table. However,
this is your opportunity to show that you can be a diplomatic,
persuasive, and reasonable business owner. Saying that you won’t
take the deal and want a better price won’t work in most
situations. Think of your own customers demanding lower price
just because they want it. In many case you will probably say no.
The best way to approach your negotiations with lenders is by
putting yourself in their shoes and negotiating the way you’d like to
be negotiated with. Assess what products and services you will use
and what value you will bring to that particular lending institution. It
also helps if your relationship is likely to grow and become even
more profitable as your business grows. There is nothing wrong
with mentioning the pricing offered by that bank’s competitors but
use it as one of several negotiating points. Just demanding lower
price because competitors offer it is a pretty bad way to negotiate,
the way that fails to build a healthy business relationship.
There is no right or wrong in how you bargain to get the best deal
for your business. However, learn to be a good negotiator. At
some point you will have to take the deal you have been offered.
So take the one you like the most knowing that you have done the
best you can to secure it and build the best possible relationship
with your lender.
| "Empowering Small Businesses" |
| Loan Financing Guide for Small Business Owners |
| No reproduction is permitted without the author's written permission |