A common stereotype prevails that banking contracts are non-negotiable, and borrowers hardly have a say in the terms of their contracts. However, this is not the case: like any economic operator, banks are also willing to compromise. Banks’ flexibility varies depending on who and when is seeking preferential treatment and on the contractual terms subject to negotiations.
What is negotiable?
In a banking contract, besides the basic legal framework for lending, almost all terms and conditions are negotiable. How flexible a bank is, of course, largely depends on the borrower’s business position and on how much the bank is interested in the lending.
In most cases, contractual negotiations concern the financial commitments required by the lender. Standard banking texts are often not applicable to the particular circumstances of a specific company or may differ from the organisation’s own system of internal controls. On other occasions, the company’s calculations may significantly differ from the formulas used by the bank in calculating compliance with the requirements. In such cases, the company’s established calculation methods may be incorporated into the contract, provided that they are properly disclosed and explained to the bank.
Corporate transactions, payments (dividends, salary increases, etc.) requiring the bank’s approval are often points to be negotiated, too. It is not uncommon, either, to incorporate certain thresholds into contracts to narrow the scope of transactions requiring the bank’s approval.
Is it possible to diverge from the General Terms?
Although the General Terms and Conditions (GTC) are a set of standard terms and conditions pre-approved by the supervisory authority, this does not mean that no divergence is possible. Most banks indicate in the loan contract itself if it includes a divergence from the GTC.
It is not unprecedented for the GTC to stipulate the bank’s right to regular termination (e.g. with a 90-day notice period), which represents a risk for the borrower. It may be worthwhile to endeavour to exclude the bank’s regular right to terminate the contract. Other provisions of the GTC may restrict certain of the borrower’s future business transactions (e.g. the establishment of a subsidiary or the sale of main assets) –the borrower may try to get these restrictions loosened.. Therefore, besides the terms and conditions of the individual contract, it is worth reading the GTC and boldly discussing the terms that are not in line with the company’s operating logic.
What about collaterals?
Financing in Hungary is characterised by over-collaterisation. Banks often secure their loans by means of collateral that is far more valuable than justified or overlap each other. While some of this collateral (e.g. security deposit) has a direct financial impact on the borrower, others (e.g. a mortgage or suretyship) indirectly affect its financial situation.
Although the scope of assets that a bank wishes to collaterise often cannot be changed, depending on their bargaining position, the borrower may persuade the lender to accept less collateral. It is also possible to limit the amount of collateral to be pledged using special legal solutions. For example, if a company takes out a loan to finance a project, it is worth to establish a separate project company. In this case, the borrower may reach an agreement with the bank that only the assets of that particular project company will be encumbered, thus the assets of the parent company can remain unencumbered.
When to negotiate?
Starting negotiations with the lender on the terms and conditions of a loan and the contractual provisions is advisable as soon as possible. Already at the stage when the bank provides its offer, it is worthwhile for the company’s managers to look out for squalls and to negotiate any questionable conditions in detail with the bank. An impulsively accepted offer may put the debtor at a disadvantage in subsequent negotiations and provide a worse basis for negotiations when trying to change the terms and conditions. Later, it may not be possible to make an otherwise seemingly rational amendment to the contract simply because there is not enough time to conduct the bank’s lengthy approval process by the planned target date. Therefore, the earlier the borrower communicates its requests, the more likely they are to be heard.
Enemy or comrade?
Many see commercial banks as enemies, fearing that the bank will take control of the company. However, it is important to understand that after a contract is concluded, the bank and the borrower are in the same boat. Banks do not aim to exploit the companies they finance, but rather to promote business growth and facilitate a long-term collaboration that ensures a regular and stable return. Therefore, during the establishment of the lending framework and negotiations of the loan contract, the bank’s and the borrower’s interest coincide. It is contrary to the business logic to impose such terms and conditions that are commercially detrimental to the company or limit its business opportunities.