What to Negotiate on Business Loans by Credit Score

Posted at 13:44h in Small Business Financing by Kelly Hillock

No matter what your business or personal credit score is, you can negotiate some of the terms when applying for a business loan. Good and excellent credit score ratings have the most leverage and can get better interest rates. But poor credit doesn’t always mean bad loan terms. Sometimes, it all boils down to what you can offer for repayment to recover losses if you default.

Because lenders profit from interest charged on loans, they lose money when borrowers miss payments or default completely. This is why they prefer borrowers with higher credit scores. When the applicant has a higher personal and/or business credit score, they’re more likely to pay on time and repay in full.

Because a good credit score is lower risk, these applicants can negotiate better terms like:

Lower interest rates
Longer repayment terms
Larger loan amounts
Loan details, like prepayment penalties or lender “call” options (where the lender can say repayment is due early based on criteria like changes to your debt ratios)

Don’t worry if your business credit score isn’t great or if you’re a new business without a score at all. You can negotiate by using your personal credit score to reduce your risk level. If neither score is great, you can offer business assets or personal possessions as collateral like your home or the equipment used to manufacture products and goods. The collateral helps lower the lender’s risk since they can sell it if you default.

Business credit scores are also different from personal credit scores. Personal credit scores use the familiar FICO scale that ranges from 300–850. But business scores are different, and there are 3 key scales to know:

FICO scores businesses on a different scale than consumers, which they call the Small Business Scoring Service (SBSS). This ranges from 0–300 and is crucial if you want SBA loans, which allow a minimum score of 155.
Dun & Bradstreet is a business rating agency that uses their own scale called a Paydex score, which rates business credit on a scale of 0–100. They break this down into 3 risk categories.
Experian also scores business credit from 0–100, but they have 5 risk categories.

The table below compares how each rating agency labels and breaks out their scales across low, medium, and high risk levels.

Risk Level	Personal FICO	FICO SBSS	Dun & Bradstreet	Experian
Low	Exceptional: 800+ Very Good: 740–799 Good: 670–739	Excellent: 211–300 Good: 191–210	Low: 80–100	Low: 76–100 Low / Medium: 51–75
Medium	Fair: 580 – 669	Fair: 161 – 190	Moderate: 50–79	Medium: 26–50 Medium / High 11–25
High	Poor: <580	Poor: 1–160	High: 0–49	High: 1–11

Now that you know how the lender may look at your risk as a borrower, here’s some of the terms you can try to negotiate to your advantage.

Lower Interest Rates

Good business credit helps you negotiate lower interest rates with lenders for two reasons:

It makes you a desirable customer because it signals you’ll pay on time and repay the loan in full, which makes lenders feel more confident that they’ll make money (and avoid losses) by approving your loan.
Because you’re desirable, more lenders will want your business. You can shop around to find the best rate instead of relying just on your usual bank. Once you have a few offers, use them to make the lenders compete for your account.

With a fair credit score, your negotiating power will depend on the type of small business loan you’re applying for. If it is equipment financing, you can use your current and future equipment as collateral to get a lower interest rate.

Pro-tip: Update your business plan to include how a lender’s loan helps you generate profits and cash flow so you can repay them. Including how well your collateral holds its value in case they need to close could help too. For example, if you’re negotiating a lower rate for a fleet of trucks, show the lender what used models are going for and what the current market demand is.

If you have poor credit or no business credit score, lenders may not be willing to negotiate lower rates on loans because you’re a high-risk borrower. If the amount you need to borrow is not substantial, try a business credit card instead. Business credit cards help build your business credit score so you can get a small business loan with a lower interest rate in the future.

Longer Payback Periods

Good credit also helps you negotiate longer payback periods because it shows lenders you can consistently manage cash flow, repay debts, and you don’t overextend your business by borrowing too much. This increases the lender’s confidence to extend a loan over more time and helps you by lowering the monthly payment, which leaves you more profit or cash to reinvest in your business.

With a fair credit rating, you may be able to negotiate the payback period if you update your business plan with projections using your current financials to show the projected growth of your company. Another option is to highlight recent wins for your business including new and large customers with long-term contracts. New developments like this won’t have enough history to impact your credit score, but they can help you negotiate by giving the lender more confidence in your ability to meet ongoing payments.

Lenders likely won’t consider longer repayment terms if your business has poor credit given the higher risk, but you can bring your personal credit and personal assets into the negotiation here. The key is to show the lender that, even if your business faces hardship in the near future, they won’t lose a large portion of the money they lend you. A great personal credit history can help, especially if you offer a personal guarantee on the loan, and so can your assets like using your house or investment portfolio as collateral.

Pro-tip: If you have a poor credit score but make your payments on time every month, you may be able to recast your loan. You won’t shorten the payment period, but you’ll lower your monthly expenses, which decreases your debt and may help you build a higher credit score.

Larger Loan Amounts

Lenders will allow you to negotiate larger loan amounts if you have good credit because you’re a reliable customer, and larger loan amounts generate larger income for the lender. A larger loan can be good for you too, even if you only need a certain amount for this loan’s purpose.

Say you only need $250,000, but you can get $500,000 at the same rate. You can use the larger loan amount to pay off other higher-interest/shorter-term debts. This could lower your business’s total monthly interest expense and boost profits. Plus, it could lower your total cash payments each month, letting you reinvest the savings for growth. It’s similar to a debt consolidation loan which you’d use for personal finances, but you’d be using it for business debts.

Negotiating larger loan amounts will be tough if your business has fair or poor credit, as many lenders have guidelines that limit total loan amounts based on the borrower’s risk. If you need a larger amount and have poor credit, an SBA loan offers high loan amounts if you meet the program’s eligibility requirements.

Here’s an example of how you can use both funding options together. Say you need $500,000 to upgrade a factory and Lender 1 will only approve $200,000. You could then apply for SBA loans for the remaining $300,000. They’re backed by the federal government, so lenders take less risk when approving SBA loans, and this can help you get to the full $500,000 you need.

Some businesses have credit so bad they can’t get an SBA loan, but don’t lose faith if this happens to you. You might not be able to negotiate for the loan you need, but you can look into equity financing, which is different from debt financing. Then, as you grow your business, you can improve your credit score for future negotiations.

Loan Details

With good business credit, you can also negotiate the loan details or covenantsthat lenders might put in the contract, like required debt ratios, prepayment penalties, or “call” options.

Here’s how these work:

Lenders require debt ratios at certain levels because they show how well you can cover debt payments without risking default. Good credit shows the ability to manage the business over time. If the lender is asking for a debt service ratio of 1.5, try to negotiate down to 1.25. It shows you have plenty of income to cover payments, and it gives you more flexibility to take on future loans if you need them.
Paying a loan off early reduces your future interest payments, so they might include a prepayment penalty. But if they want your business, you can negotiate the penalty down or away completely as low-risk borrowers are almost always in demand.
Call options are where the lender can force you to repay the loan early based on triggers like debt ratios falling below certain levels. If the lender won’t negotiate a lower debt service ratio, use your good credit score to get rid of a callable option in case of temporary situations that won’t hurt your long-term ability to repay the loan in full.

If your business has fair or poor credit, you likely won’t be able to negotiate these details since lenders use them to protect against default. If you can’t live with details in a loan, use personal guarantees or assets as collateral to negotiate a change. If a lender won’t get rid of a callable option, try to negotiate a 2-stage option where you provide more collateral at first.

Now that you know what to negotiate on a business loan with good credit, contact us today and we’ll work with you on a customized small business loan. Whether you need short-term inventory financing or a long-term growth investment, we can help.