Financial managers responsible for negotiating term loans from commercial banks often feel confronted by a dead end—the banker’s restrictions (restrictive covenants) on the company to ensure repayment. While the ultimate objectives are easily understood (getting the least expensive funds under the fewest restrictions) but achieving them in reality is not. “Since the first caveman loaned a spear to a friend only to have it returned the next day broken into little pieces, lenders have been cautious in dealing with borrowers”. Moreover, lenders know they have a certain power over borrowers and have turned it into a mystique. Unlike the case in other contract negotiations, many borrowers feel they have few, if any, cards to play—that is, they have to take most of what the banker decides to dish out.
But don’t you think that it is us, the borrower, who should have the upper hand. We borrow and thereby generate revenue for the banks. So we should always try to negotiate provided we are doing that on proper grounds!
So after helping lot of companies across Industries we have found that it’s never a one sided affair as it appears. So on a lighthearted note we can say – It’s a battle between two forces to see who emerges out as a winner or who is savior.
To help companies devise an effective negotiating strategy our company briefed them on few things which would lead to better negotiating power :
- Firstly learn to think like a banker & identify their objectives (which are revenue maximization and also client acquisition + retention). So you can weigh them down on the basis of the latter motive
- So try to put it in sync with the banker’s objective with less damage to their position
- Set a priority list on restrictions & associated cost wanted by the banker, so the major issues only are negotiated with them thereby helping the company
- Always have backup quotes from other banks for better quotation. We have already stated in our first point that Acquisition + Retention = Success for the bank so they wouldn’t like you go !
We take this opportunity to share a real time case study which encompasses the kind of savings we could affect for one of our clients on Interest Rate Negotiation for Long term & Working Capital Loans :
Client: ABC (Name not disclosed as per confidentiality clause) was a mid-sized Textile company into the export business of Garmenting with a portfolio of $ 20 million
Banking Profile: ABC had a long sturdy relationship with a Public sector bank to fulfill its Financing, Cash Management & Investing needs
Expectations: Since ABC had a long relationship so they felt that the bank would never take them for a ride or even if they do it will be marginal. ABC engaged IFA mostly out of curiosity and had little or no expectations for.
Engagement Parameters: ABC made it clear that any improvements would be limited to existing banks and that alternative banks would not be considered. Further, the treasury team was already exhausted with their daily routine work and would only be able to devote a minimum of time to the engagement.
Process: IFA conducted a thorough assessment of the ABC’s treasury function, including banking relationships, systems, and business processes. Using its Yield 360⁰ process produced a comprehensive analysis enabling XYZ to see a true comparison of its Interest Rates, Exchange Margins, Style of Booking, Banking Charges, Sanctioning Fee and Processing fees across its existing banks and alternative banks. The analysis revealed the potential for significant gains in their overall liquidity performance. Accordingly, IFA helped ABC to lead negotiations with existing and alternative banks. The impact on ABC’s Treasury team was minimal as the Treasury Audit Report (TAR) was prepared by IFA’s Team and, as authorized by XYZ, relevant discussions, bank transitions, and services adjustments were led by both the team’s personnel together
Outcome: Over a 4-5 month period, ABC systematically calibrated its overall banking relationship management structure in accordance with IFA’s recommendations. Betterment in Interest rates, savings on banking charges & transaction cost, Effective booking mechanism & more structured hedging mechanism was put into place despite its initial sentiments to the contrary. ABC did establish relationships with alternative banks that offered yield and services at rates far more competitive than the improved rates of the legacy banks. Today ABC is saving a large chunk on its Interest Cost, as a growing company would need funds for growth and right source of funds at the right rate is very necessary to be cost effective.