By Corey Henriksen
When your lender says he is giving you the best deal he can on your financing, he can always do better—and will—with sufficient motivation.
Here is what to do…
Supply the Motivation—Competition is Good
Let your lender know that you are going out to the market. Just because you received what you think is a good rate from your current lender, this does not mean that the market is not better than you perceive. You could get an even better rate from other lenders or from your current lender.
This is an unprecedented time for financing for our industry. Both short-term and long-term rates are historically low. And, interest rate swaps provide outstanding pricing for long-term fixed-rate in a rising interest rate environment, as well as no prepayment penalties, and the possibility of cash back should you have to terminate the loan early and break the swap.
My perspective is that of an attorney and an adviser representing solely petroleum wholesalers and convenience store retailers in securing financing. I help petroleum industry borrowers increase working capital and accounts receivable/inventory lines of credit and obtain acquisition, construction and refinance funding, as well as work out loans that were either securitized in pools or held in portfolio. I am not an economist contemplating “what if’s” or future probabilities; my focus is solely on getting the deal closed at the best possible rates and terms for the petroleum industry borrowers I represent.
Negotiate Hard—You Gain No Benefit by Leaving Money on the Table
As a general statement, a lender credit committee will look at a number of indices in underwriting the loan. As long as you meet the minimum credit committee requirements and pay on time, you are perceived as a good piece of business that they would like to have in their loan portfolio. While a higher yield obtained by the lender is looked upon favorably, it is generally not a determining factor for credit committee approval. The simple reason is that a defaulting credit is a defaulting credit no matter how wonderful the anticipated yield. Therefore, you gain no advantage by leaving money on the table for the lender in the way of a higher yield.
In addition, spreads and terms required by credit committees are not set in stone. Lenders who are similarly situated have to compete against each other for “good business loans” and therefore set their credit committee requirements based to some extent on what market rates and terms are at the time of their review. That is why it is so important for you to go out to the market each time, even if you plan to remain with your current lender. Rates and terms change; you will need to educate your current lender so they can align themselves with the market in order to retain your business.
Will negotiating hard negatively impact your current banking relationship? What about checking the marketplace? Your lender expects you to respect him “as a good lender” when, due to market conditions, he needs to reduce lines of credit or check valuations through costly re-appraisals, etc. Your lender should respect you “as a good businessman” to periodically check the marketplace to maintain market rates and terms for your business.
Will you strain the relationship with your current loan officer? Remember that your loan officer wants your business. As a professional, he now understands that he will have to work harder for it. In addition, it is important to note that the latest downturn has created a new normal with regard to layoffs and new hires. The odds of maintaining the same loan officer (or even the specific lender, for that matter) over an extended period of time have diminished greatly. Most likely at some point, you’ll be handed off to another loan officer who has no history of interaction with you, and left with only the foundation of your negotiated transaction to serve as the basis for the ongoing relationship.
Present the Package to a Number of Lenders, Not Just Your Current Lender
I am a believer in surrounding yourself with competent people who are playing to their strengths. If you utilize an adviser, then choose only professionals with proven performance and base their fees on success. However, if you want to seek the financing yourself, the following four guidelines are important:
- Prepare a full loan package for the lenders that you will approach, and also for your current lender. Every loan officer has stacks of paper on his desk. Don’t assume your current loan officer has all the information that he would need to justify better rates. Anything that you can do to make the loan officer’s job easier will work to your benefit.
- Tailor your loan package to each specific lender’s requirements. Research what each lender wants in the package and how they arrive at their required ratios.
- Present to the right lenders. Do your homework. Find out who is funding the types of loans that you are seeking. Presenting the package to the wrong lender wastes their time and yours.
- Present to the right decision-maker in the lender’s hierarchy. That way your package is not shuffled around from person to person with no decisions being made.
The dollar amounts at stake are very big when it comes to financing. Because of the historical lows in rates today, it is easy to become complacent with what you think is a good rate. Unfortunately, it is human nature that only when your lender knows that he has to be competitive with the marketplace, will he sharpen his pencil to your benefit.
You make your margins in pennies. Obtaining the best rates and terms requires effort, a shift in perspective and a well thought out strategy. Don’t let hundreds of thousands of dollars slip through your fingers due to complacency.
Corey Henriksen is Managing Director of Acquisition and Refinance Capital, Inc., a firm founded for the sole purpose of obtaining numerous capital alternatives for wholesale and retail owners and operators in the petroleum industry. Corey is a member of NACS, SIGMA, CIOMA and WPMA and is a regular speaker on financing for petroleum retailers and wholesalers. Corey can be reached at 949.481.8500 or www.AcqRefCap.com.
