Negotiating with banks when getting a loan is not only about getting the most rewarding end of the deal. There are a lot of regulations and policies to be considered here after all, and you must be aware of each one to ensure a smooth process. Bob Roark talks with the CEO of Pikes Peak National Bank, Robin Roberts, to delve into the right approach to bank negotiations. She explains why you can't argue with banks about submitting tax returns and financial statements, delving into why it is not an invasion of privacy. On the other hand, Robin talks about loan covenants - which are negotiable - detailing how you should discuss its specifics with the bank to come up with a satisfying agreement for both parties.

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Robin Roberts: What You Must Know When Negotiating With Banks

Have you ever wondered why banks sometimes do things that are not quite clear? In this series, I have Robin Roberts. She’s the CEO of Pikes Peak National Bank. She’s here to demystify some of the things that might be bothering you. One of the things that we talked about at length is how to negotiate with your bank. There are so many people that miss this one particular component and it is not the 1/8 of the quarter that you negotiate on the loan. Oddly enough, it might be the covenants that you might want to spend some time on. Take care, enjoy, and I hope you learn something from this episode.

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What can you negotiate with your bank? If you’ve finished negotiating with your bank and you’ve got an extra 1/8 off on my five-year fixed 30-year amortization note, don’t necessarily pat yourself on the back. You may have missed basically the entire positive things that you can do. In this episode, we have Robin Roberts. She is the CEO of Pikes Peak National Bank to illuminate and demystify what you can negotiate with your bank in the commercial loan for your business.

The first thing that business owners who have not borrowed before, they equate commercial loans with getting a residential mortgage on their house or getting a car loan. That’s a consumer purpose loan and those types of loans have their purpose. They are very different. They’re regulated differently. They have different laws that cover them than commercial lending. Commercial lending is its own animal. It’s important for business owners to understand commercial lending, how it is different than getting their residential mortgage, and how the process was. Not just now when you get the loan, but over the course of the loan because the bank is much more involved with you on an annual basis with your loan than when you get your residential mortgage for 30 years. You make your payment every month and no one ever bothers you again from the mortgage company or the servicer. You make your payment and you’re good. Commercial lending is not that way and business owners can, if they understand the whole process of the loan, negotiate things at the beginning of the loan that will help them 2 and 3 years down the road.

For a lot of them, when you do your home mortgage and you do it through a bank, most don’t realize or don’t realize until they get a notice that the note’s been sold. It’s not on the bank’s balance sheet and their responsibility and concern about your note is now gone. Whereas the commercial loan is the banks are intimately interested in making sure of the quality of your note because it resides at the bank that you have the note from it and it’s not sold.

[bctt tweet="Most small business loans are not sold. They're held on the bank's books to be monitored regulatory-wise." username=""]

Most commercial loans and small business loans are not sold. They’re held on the bank’s books and the bank has a responsibility regulatory-wise to monitor that loan portfolio we grade it actually on an annual basis. What are these loans doing? What are the businesses that have borrowed? How do their financials look? Have they taken on additional debt since we originated the loan? Have they lost their largest customer, so their revenues are down? Has COVID affected them or lockdowns affected them? It’s a restaurant or hospitality loan, and we need to watch it for the next twelve months.

All of these things banks are paying attention to on commercial loans. A normal part of commercial lending or for a commercial borrower is that you’re going to provide financial statements and tax returns to your bank every single year. This is shocking for some new small business borrowers because they are not used to doing that and they find it to be invasive privacy-wise and I would say to don’t borrow commercially because every bank is going to ask you for your tax returns on an annual basis if you’re a commercial borrower and they’re required to do so. It’s not like this bank is doing it because they want to invade your privacy and the bank over here is not going to do it. All banks are going to do that on commercial borrowing.

Most folks think that the bank is being nosy. You go like, “Fine. I’m not going to send them my return or my financials.” What happens as far as the bank’s perspective of that note if you don’t share your return or your financials as required?

There’s a lot of things that happen. Whether you realize you did or not at the time that you borrowed the money and signed the promissory note, you agreed. It’s a covenant that you have with the bank. You agree to provide financial statements and tax returns, not on an annual basis, but whenever the bank requests them. If you decide, "I’m not doing this," the bank can’t, from a regulatory standpoint say, "We can verify the cashflow. We know how this loan is being repaid, so it remains a good-graded loan in the bank’s portfolio." If you stopped providing financials, they usually have to downgrade that loan in the bank’s portfolio. That makes your life much more difficult than if you had handed over the tax returns that you agreed to do when you got the loan. We’re going to probably do a new appraisal on your property. We’re going to do everything we can to mitigate the risk because we can’t verify your cashflow.

You don’t need to pay for the appraisal.

[caption id="attachment_5915" align="aligncenter" width="600"] Negotiating With Banks: Providing financial statements and tax returns to banks is shocking for some new small business borrowers because they are not used to doing it and usually find it invasive.[/caption]

 

No, the customer pays for the appraisal because that’s another covenant. I’d love to talk about covenants really quickly in this commercial loan. If you borrow $50,000 as a small business loan, you’re probably not signing any covenants. If you’re buying a property and you’ve got a loan of several hundred thousand dollars or more, you’ve got some covenants on your loan. Covenants are more than just, "I agree to make this payment every month by this date." Covenants are a separate agreement that you’re making with the bank that says, "I will provide financial statements and tax returns. If my property value changes, I will pay for an appraisal. If the bank decides that they have to do a new one, I will pay for it.”

There might be a covenant that says, "I will not borrow more than $200,000 without talking to the bank first. I agreed to maintain a certain debt coverage ratio for the entire time that I have this loan." The covenant will say, "This is how the bank calculates your debt coverage ratio. I agree to keep a debt to net worth ratio of such and such." These covenants are in your loan and a lot of borrowers don’t know that they’re there or they hear it at closing, but all they care about is getting the new property, the new equipment, or the money to buy a new business. They don’t care about them then. They start caring about them when the bank says, "You’re in violation of this covenant," a year later and this is a key part of commercial lending. Just because you make your payment on time every month, it does not mean you cannot be in default on your loan.

You can be in default by being in default by not being in covenant. You’re out of covenant. Your debt service coverage ratio is out of covenant. You’ve borrowed money and you didn’t ask the bank and it is in excess of your covenant. You’re out of covenant. You can be in default on a commercial loan because you’re in default on a covenant, not on your monthly payment. This is something that I want commercial borrowers to understand. I also want them with these covenants is if you know that they’re going to be there, when you’re reviewing your loan documents, you can ask about them, and you can negotiate them. You can’t negotiate providing financial statements and tax returns. You’re going to provide those. That can’t be negotiated, but maybe you can negotiate that you don’t have to ask the bank until you borrow over $500,000 or maybe your debt coverage ratio for the bank is 1.2 and you want it to be 1.1.

You want to understand these covenants and negotiate them. Stop worrying about whether your rate is 3.85 or 4, and worry more about, “I don’t want to be out of these covenants.” Are they realistic for my business? Do I have to borrow for my business? Am I going to buy more equipment? Is this borrowing cap going to cause problems for me and limit my growth? Negotiate th