Negotiating a Loan during Slowdown

Ten-Point Recipe for Loan Negotiation with a Bank in Slowdown

Most first generation entrepreneurs, CFOs and CEOs of mid-corporates find it tough to negotiate a business deal with a bank. Banks usually are tight-fisted in times of recession to grant enhanced limits. They also claim full information of the enterprise, ecosystem in which it operates and the depth of the export markets. They also have a track record and credit record of the enterprise seeking to expand its operations. Economy in slowdown is tough time both for Banks and Enterprises. One has to run twice the speed in slowdown to remain where they are like Alice in the Wonderland.

Exacerbated NPAs despite the IBC have made Banks risk averse. Increase in frauds further accentuated risk aversion. The enterprises requiring higher working capital and those in export markets requiring packing credit facilities are facing formidable challenges. However, Banks may not like to lose good clients. Further, particularly those in PSBs, are also under pressure from the government to expand the portfolio in farm and MSME sectors.

Banks also actively work on the recoveries, write-offs of NPAs and topping up their Balance sheets. They are under pressure on the Asset side of the Balance sheet and therefore, look for clients who, despite slowdown, come up with a good proposal. And a good proposal in their parlance means that they would have little to exercise their thinking. Their time is under pressure most times in video conferences, meetings, Seminars, publicity and several internal committees.

Look at Mr. Raman who understands the predicament of the current banker and who is a CFO of a mid-sized corporate entrusted with the task of increasing domestic market by 100% and overseas market of the Company’s innovated tablets and injections duly approved by the US Food and Drug Administration. He is sure that the Banks would not like to lose a good client for another bank. Since his Company has proven track record, he was hopeful of the deal for higher limits on both working capital and export packing credit.

He took an appointment with the GM (mid-corporates) of the Bank one fine morning. He did his homework well. He gathered full data of the enterprise; environment in which the entire industry has been working; economics of his proposal; the area into which the Company would like to expand; the types of clients the company are targeting; the distribution system of the new markets; the incentives Company has on table; the drug controls of both India and the Asian economies in which the Company is going to operate; the disease patterns there; government health care and insurance mechanisms; the IPR and above all the financials. He also worked on the stress testing of his projections.

He presumed that in the first instance the Bank would know of the enterprise and ecosystem equally well. He started off with all humility. During the discussions, when he noticed that Bank officials do not have half the information, he had either on the product or competitiveness but are looking at only the financials and spreadsheets and not the rationale behind them, he pitched his fork high. He left some issues deliberately for the bank to come up with subsequently. He did not press for a solution instantaneously. He left a cooling time with the Bank.

After three days, when the call came, he went with his accounting team and with the required project proposal in the bank’s usual format. He took care to ensure that no additional collaterals would be offered. He kept under his armpit the directors’ individual guarantee to offer when necessary. Finally, when asked, he just mentioned that it was the company’s intention to go for public issue at a propitious moment and raise equity to meet future needs and therefore, it would be difficult to offer the same at the moment. The deal got through.

The recipe is simple:

1. Do your homework well: know your own enterprise, its SWOT.

a. Brainstorm possible implications of the proposal with the Board and internal management.

b. Cushion the proposal with adequate collaterals and guarantees but keep it undisclosed.

c. Go as a team for presentation with your confident technical and financial team for discussion.

2. Do not thrust yourself at inconvenient times for the banker.

3. Be transparent during negotiations.

4. Be humble; but do not compromise on limits sought as it might affect profitability.

5. ERP will help keeping the data required by the Bank and tax authorities transparent and timely.

6. Go with a vision, objectives and goals for the future.

7. Keep also the succession plan ready.

8. Give reasonable time to the Bank to think and come back with their offer,  but indicate your expectation for the result and also indicate that a Bank and a leading NBFC have also indicated their willingness to look at the proposal to attract competitive pricing of the loan.

9. Post sanction and post disbursal, keep compliance of terms and conditions tidy.

10. Make sure of half-yearly review of the limits by the Bank by feeding the required data online.

The above principles work equally well for the MSMEs. Since the MSMEs lack the attributes of a CFO and accounting team, they need to look for committed process consultancy firms like the Telangana Industrial Health Clinic Ltd (TIHCL) who handhold them and help scaling up with strategic interventions at the right time.

Published in Telangana Today