First, in order to negotiate the best terms that you can from either a bank or a venture capitalist, it is essential that you have a solid business plan and sound financial books and records prepared by a certified public accounting firm. That firm should be generating quarterly and annual statements, because one of the first things a lender or investor will ask you for is current and historical financials.

Second, you must have a formal business plan. No lender or investor will advance you its money unless it knows how you are going to use it. It’s not enough to say that you need the money for expansion; you must be prepared to say specifically what you will spend that money on to expand: technology, inventory, salaries for new employees, marketing, larger facilities, machinery, equipment and the like.

Third, the lender or investor will want you to pledge some or all of the assets of your business as collateral. Those assets may include machinery and equipment, inventory, accounts receivable, patents and copyrights, trade fixtures, real estate, and contract rights. Lenders and investors consider different debt to equity ratios depending on the type of collateral. Often times, personal guaranties are also required from the principals of the business as well as their respective spouses. Liens on personal assets such as real estate are also required much of the time.

Negotiating properly is critical to ensuring a viable relationship with a lender or investor so that your control of the business is maintained and that the purposes for which the capital is sought may be satisfied. Although a “term sheet” or even a commitment letter may look as though it is made of granite, experience has shown that good lenders and investors are flexible. This means that things like net worth, profitability, cash flow, and other requirements may be negotiated. To do so effectively require experience. On-the-job training can prove to be costly: you can find your assets and your cash are tied up too restrictively unless you know what you are doing. You can also find that, with a bit more knowledge, you could have stretched your borrowing capacity. If you’re unsure, you should negotiate with the aid of someone experienced in these areas. . Remember that the people who negotiate for the lender or investors are professionals. They do it for a living. You cannot approach this process an amateur if you’re going to deal with them at their level, and expect to get the results that you need.

It’s also important that your legal house be in order. The stock of your business should have been issued, and the holders noted in the stock ledger. Organizational minutes and by-laws must have been adopted. Officers and directors should be elected annually. Your corporate or partnership records should reflect the exacting standards that you employ in the operation of your business.

Once the terms of the loan or investment have been finalized, and it is ready to be funded, you will find that the corresponding documents will have to be prepared and reviewed. At this point, you should have a lawyer familiar with the negotiations and versed in asset-based lending and venture capitalization render assistance. The terms of those documents must conform to your understanding of the underlying loan or investment. And those terms, too, may be changed, so that your expectations will be met.

Finding the right lender or investor, and getting the right kind of funding on the terms that are most favorable for growth, is as important as the products or services you sell. Review the following questions before you start negotiating and keep them in mind during the process.
• How much capital will your business need?
• What can your business afford to repay?
• Which assets are available as collateral for the loan or investment, and what is the real value of such assets?
• How soon do you need to act?
• Are your financial books are in order?
• What is the history of the institution with which you will negotiate with respect to lending to your industry or one similar to it?
• What alternative financing do you have available if find an institution is not interested?

Once you have begun the negotiating process, you must be prepared to do the following:
• Appear ready to terminate the negotiations and proceed to your alternative financing source;
• Demonstrate by way of professional appraisals the “knock-down” value of the security that you propose as collateral for the loan
• Demonstrate industry trends and the positions of your competitors
• Detail your knowledge of lending to your industry, and emphasize the attractiveness of customers such as you to other institutions
• Emphasize the likely account balances that you expect to maintain at the lender, whether payroll, escrow, general operating, retirement, and other such accounts
• Emphasize your experience in operating a successful business or businesses, even if not the one you are negotiating for;
• Bring your up-to-date financials with you;
• Bring all written plans, whether a general business plan or architectural plans for your expansion, to your first meeting; and
• Show an appropriate degree of confidence in yourself, your business team, and your company.

If all goes according to plan, and your company achieves and sustains solid growth, you will probably go through the entire process again. Of course, each round gets easier, especially if you keep some of these ideas in mind.