How to Negotiate With Your Bank When Your Company’s Cash Is Tight

woman sitting while undergoing irs audit

Into any small business, a sudden cash crunch may fall. This certainly rings true for the millions of small businesses dealing with the fallout from the global COVID-19 (coronavirus) pandemic. But it's also a regular reality for almost every entrepreneur. Natural disaster strikes; a big client delays payment; the street in front of your café is torn up for repairs. Disruption happens, and many small businesses are strapped for cash when it does.

According to a Federal Reserve survey from the second half of 2019—just before the COVID-19 crisis—86% of 5,514 small firms said they would need to take some action to supplement funding or cut expenses if faced with two months of revenue loss. Of this group, 47% said they would use personal funds to bridge the gap, while 17% thought they'd have to close their doors. Nearly half of respondents who had applied for funding in the past 12 months said they would take on additional debt to overcome a cash crisis. That's where bank funding often comes in—and why it's important to know how to negotiate with your bank.

How to Get Help From Your Bank for Your Business

Reaching out to your bank if you're anticipating (or experiencing) significant cash flow issues is always the best first step. In addition to helping relieve your cash needs, your banker may also be able to discuss the possibility of deferred payments, reduced fees, improved rates or additional services to help you through a tough time.

You don't need to contact your bank for every minor cash flow hiccup. But if your business is experiencing long-term challenges or if you are likely to miss loan payments, sooner is better for a frank conversation. Here are a few reasons why:

  • Acting early means avoiding pitfalls. The best time to create a plan of action is before you deplete business funds, tap into personal assets, raid your retirement, miss payments or max out your available credit. If you plan to borrow money to get your business through a tough period, you are likely to get better terms when your assets and credit are intact—before a spike in credit utilization or late payments affect the business credit score you've been working hard to establish. In fact, acting strategically early may help you avoid these pitfalls entirely. If you're already past that point, don't worry—you're not the only business in a difficult situation. Read on.
  • You can learn about your options. A new loan or a low-interest credit card offer could be just the infusion your business needs to weather a crisis. Although you may ultimately consider alternative sources of funding, understanding what your bank has to offer is a good start. It may also be the gateway to specific resources, as it has been during the COVID-19 crisis. In this case, many banks processing SBA loans have worked almost exclusively on applications from their existing customers.
  • You can optimize your banking relationship. If your banking relationship consists of a basic checking account and a credit card, you may not think of your banker as a trusted financial advisor. But in an ideal world, they might be. This is your banker's opportunity to be more to your business. Can they offer competitive rates on merchant services? Are there discounts available to premium customers? Can your banker provide referrals, resources and advice? A good banking relationship is symbiotic: Your bank succeeds by helping you succeed.

7 Steps to a Better Negotiation With Your Bank

In a tightening economy—and faced with a cash crunch—you may wonder whether this is a good time to ask your bank for a loan or for any other consideration. While it may not be the best time, it could definitely be the right time. If you're a valued customer and you represent a good risk, you are ready to negotiate. Here are a tips for preparing to negotiate:

  1. Know your business credit score. Your small business has its own credit score, based on factors that include the number of trade experiences you've had, outstanding balances, payment habits, credit utilization and business size. Getting a copy of your business credit report in advance will help you speak with authority about your creditworthiness and your business's ability to transcend your current challenges.
  2. Get your story straight. Be ready to articulate—in a few sentences—what your situation is and how you would like your bank to help. You can, and will, provide additional details throughout your discussion, but having a quick summary ready will frame your conversation from the start.
  3. Know your numbers. Review your finances so you can speak to overall growth and profitability in your business, the impact of recent events or trends, and how much money you need to position your company for success.
  4. Bring ideas. Take a few moments to familiarize yourself with some of the options your bank might have to offer, including SBA loans, lines of credit and low rate credit card offers. Also review everything you're currently doing with your bank. Can your accounts be consolidated? Are all of your services necessary? Are discounts available based on the business you bring?
  5. Be open. While you want to stand your ground in any negotiation, be prepared to compromise if the terms you're offered are acceptable and you think a better offer is unlikely. If your banker has an idea you didn't think of, hear them out.
  6. Understand your alternatives. At the same time, don't agree to anything you don't understand fully. Ask questions. Get an outside opinion if you think it would be helpful. Remember you have other alternatives: contacting another bank, using personal funds, negotiating with vendors and creditors, crowdsourcing, and cutting expenses. Hopefully, your bank will beat these options. If not, you have a plan B.
  7. Take your time. Any financial shortfall can feel like an emergency—especially when your business is at stake. Nevertheless, don't be afraid to take a moment at the end of your negotiation to think through what you'd like to do next. Will the proposed solution really solve your problems? Are you prepared to take on additional debt? Can you move forward with confidence? Find clarity before you proceed: The road ahead is long.


Building an Alliance

Think of your bank as your ally in maintaining the financial health of your business. When cash is tight, the idea of having a discussion with your banker may not be fun, but it may help you overcome temporary challenges, build a more productive banking relationship and set your business on the right track for recovery.