The 4 Secrets of Successful Lender-Borrower Conversations [Podcast]

February 29, 2016 Bill Briggs


Negotiating with borrowers is where the rubber meets the road in pricing. It is also something that very few lenders are trained to do – instead they have to learn by trial and error.

Negotiation can bring to mind an adversarial situation, but it doesn’t have to be that way every time. Many times the bank and the borrower are much closer than it seems when you first sit down.

If you can stay true to 4 simple ideas, every negotiation will be easier and more successful.



Podcast Transcript

Dallas Wells

Hi, and welcome to LenderPerformance, you’re guide to becoming a better lender. Dallas and Jess here from PrecisionLender, thank you for joining us.

Jessica Stone

Today we’re talking about negotiation. Negotiating with borrowers is where the rubber meets the road in pricing. It’s also something that very few lenders are trained to do, a lot of folks just have to learn by trial and error. Dallas, I’m thinking you might know that from firsthand experience?

Dallas Wells

Yeah, that was my training methodology was throw me on the phone to try to negotiate a deal, and it didn’t go so well. I remember one of my very first ones. I was young, right out of school. We had an upset borrower that I was supposed to be helping on the relationship with, and he wanted to refi the deal but there was a big fat prepayment penalty on it. He didn’t want to pay that, and felt like it was very punitive. I’m the sucker that gets on the phone. I thought I did, in my mind, a very elegant job of explaining exactly why the math worked the way that it did and why that number was very fair and reasonable. His response was “Well you can go just like the rest of them and go jump in a lake,” and he hung up the phone.

We didn’t get what we wanted. He eventually made enough noise that he got the fee negotiated down anyway, and it was down just enough where he could eventually take the deal elsewhere. It all ended badly, and I was clearly one in a long line to try to negotiate with this poor guy and we just didn’t get anywhere. That’s kind of how training typically happens. Bottom rung of the ladder folks have to deal with the most upset customers and just hope you pick it up along the way. I think that’s a really terrible approach, so that’s what we’ll talk about today.

Jessica Stone

That’s right. We’re going to talk about some of the elements that go into negotiation. Before we get to anything lender or borrow-specific, we wanted to back it up and think about this in kind of a 30,000 foot view because at the core of a lender-borrower conversation, it’s really about 2 people trying to find a mutually beneficial outcome. During that it’s important to have empathy for your counterpart.

Dallas Wells

Empathy, it’s talked about a lot. It’s a word that gets thrown around a lot, but it’s incredibly important for negotiating. It’s not just because of the idea behind empathy, that connotation that goes with that word that you’re going to be nice and friendly and understanding, but it’s also about that if you really, truly do switch sides of the table so to speak and understand the issue from the other person’s perspective you can figure out what they’re really after, and you can find some things to trade back and forth.

It’s one of the principles, before we get into the loan and borrower negotiation parts of it, always starting with empathy. Anytime that there’s a transaction or relationship that’s being negotiated or that you’re working on what the moving parts of that look like.

At PrecisionLender we always make that the first priority. We try to remind ourselves when we interact with clients how we’d like to be treated, and so our approach I think can transfer over. It’s not a complicated one. We just try to always envision these interactions from what do our clients feel and experience during any of these kinds of things. It’s negotiations, it’s support issues, it’s questions they have, it’s when we onboard them. We try to stick to 4 basic rules for those interactions. We did a little bit of research with these, but a lot of it is just really built around the empathy.

Be Fast

The first one is be fast, so anytime you research ways to please customers and provide “good customer service” most banks claim that that’s the way they differentiate themselves is through good service. Be fast is always number one on the list. Its one that I think banks struggle with the most. Banks are not exactly known for being speedy, and so use that to your benefit. Be really quick and communicate back in a really fast, efficient way. Give fast answers. That’s always our number one rule, is quickly acknowledge that someone has an issue and just understand that they had something that they wanted to talk about urgently and you got back to them right away.

Be Nice

Number 2, this one kind of goes back to the things you learn in kindergarten, it really follows you around, be nice. It’s kind of a given, but it really does help. Part of what we mean by be nice is to be human about that too. If you mess something up, instead of saying “We sincerely apologize for the miscommunication,” say “Hey, I’m sorry.” Use a human being kind of words and talk to them as a person and just be nice. The same thing in negotiating. When we’re working on contracts with prospects or renewals with existing clients, be nice, be understanding, be friendly, and use human words and deal with it as 2 people rather than as representatives of 2 organizations. You really will get a lot farther with that.

Be Trustworthy

The third one that banks should be all about this one, be trustworthy. When you say you’re going to do something, follow through and do it. In negotiations, usually negotiations are kind of a drawn out process between a bank and a borrower, if you owe them an answer on something, be trustworthy. Get that answer to them when you said you would, even if the answer is I don’t yet know. Respond when you say you were going to respond, and fulfill your end of the bargain.

A lot of negotiation that you see go awry between bankers and their borrowers, it’s because the borrowers feel mislead. They feel like there’s something that was implied or promised early in the conversation, and then when they get to the closing table it’s a different thing. The banker may have a legitimate reason for why it changed in the middle, but all that the borrower knows is you told me one thing, the deal ended up being a different one. You have to be trustworthy, you have to be true to the things that you promised or even implied. A lot of times that means when you’re talking about a complex transaction it’s being very clear and concise, putting it down in writing when you need to so that you can be trustworthy about holding up those things that you’ve committed to.

Make Them Great

help-others-achieve-their-dreams-and-you-will-achieve-yours-help-quoteNumber 4, and I think bankers should like this one, our rule number 4 is just make them great. Our job is to make our clients really good at what they do. Banks are really built on that premise. If they go into every negotiation as “Hey, we want to make you great at what you want to do.” It’s not about I wonder if we can sneak in and then extra little fee or squeeze a couple extra basis points just because, so we would’ve charged them 4.5 let’s try for 4.57 just so we can sneak that in there. The idea should be find the right solution, create some real value for that borrower, help make them great at what they do, and there will be plenty of value there leftover for the bank. There’ll be money left to pay the bank if you do your job with the right financing to the right project and make them good at what they do.

All of that is really about empathy. Every time you have any kind of interaction or negotiation, start on the other side of the table and think “What’s my borrower looking for out of this?” If you can help them get that, they’ll be more than happy to help you get your own part of that too, but you have to start on their side first.

Jessica Stone

Yeah, putting yourself in the shoes of a borrower can certainly help you connect with your client. In fact, a 2015 article in the Harvard Business Review entitled To Win People Over, Speak to Their Wants and Needs, says “Once you started to develop empathy as a skill, you can make it integral to the work you do.” It goes on to say empathizing can give you better ideas, makes you worth listening to, and if your stakeholders feel like they can empathize with you in return, you’re on your way to really building a lasting relationship and it becomes a 2-way street where you’re both kind of considering the other party.

Dallas Wells

I think that’s kind of related to that basic premise of we’re 2 human beings in a discussion about trying to find a way that this works for both of us. People have this natural inclination if you help me get what I’m after and you do that proactively and you come across the table and do that first, I’ll look for ways, I’ll go out of my way to find a way to say “What do you need out of this? Let’s get you that too.” I think that’s a great way to put it, is just build it as a way that everybody can win and build it into the organization. It’s not just a skill that you’re born with, but something that we can make an organizational practice of really meaning when we say customer first.

Jessica Stone

Related to empathy are ideas of transparency and authenticity. Dallas, why do you think those 2 elements are so important?

Dallas Wells

If you think about the typical bank negotiation and that discussion between a lender and a borrower, the danger there is that it can pretty quickly go to one of those negotiations where one side has way more information than the other.

If one side’s operating in the dark and they feel like the other side has all of the information and kind of all the power in that relationship, whatever the outcome, even if you end up giving them a real bargain, they’re going to feel like they got ripped off. I’ve seen this one firsthand, where the bankers kind of tried to play coy and play the cards close to the vest and say “Well, you’re going to have to do a little better than that,” that’s kind of their negotiating tactic of … The borrower says “I want to pay this,” “Well you have to do a little bit better than that.” It’s always this very much in the dark, so the borrower’s trying to aim at this unknown target that you have sitting out there, this line in the sand that they don’t know where it is.

I’ve seen those where the borrower comes out ahead, they end up with one of the best deals that we would’ve offered, and yet they leave kind of shaking their head like “Man, that just felt kind of dirty. There was nothing warm and fuzzy about that. There’s no way to know if that was a good deal or not.”

You can think of it kind of like negotiating a repair bill with your mechanic. If you’re like me, they’re going to know a whole lot more than you about what’s going on. All I know is I brought in my car because it was making a funny noise, so you can tell me that I need the entire transmission replaced, you can make up something and tell me I need to refill the blinker fluid. I’m not going to know what the deal is, and so whatever price you tell me my immediate reaction is going to be am I getting ripped off here. Is this really what the thing is? I may pay for the repair and I’ll leave with a vehicle that’s now in working order, but I don’t leave with a warm, fuzzy feeling.

If you can compare that to something that’s very transparent, very, I say authentic just because everybody knows what’s going on going in. Buying a new iPhone, you can find the price anywhere. You can find it on a website, you can find it at the store, you can see a giant list of specs that you can dig as deep as you want. You can definitely dig deeper than you probably have the technical knowledge to understand. You can look at user reviews, you can ask friends, you can play with it in the store. You know what you’re buying and you know what the price is, and you know how that deal compares to where the price is everywhere else. You can make the buyer decision to say “I think this is worth the X dollars that it costs,” and you trace the money for the phone and everybody leaves happy.

Both people leave with what they want, a working car or a new iPhone, but the emotional feeling that you have attached to that transaction is very different. For the banks that we’ve seen do really well with this, the banks can quantify kind of what they need out of a deal. When a borrower comes in and is asking for something other than that, show them your cards. There’s no reason to say “Well, sorry that deal’s just not quite good enough.” You’re not selling a used car, you’re doing a very important financial transaction for that borrower, so help walk through them why the deal needs to be different. We’d love to do a 10-year fixed-rate loan for you, but that’s just really expensive for us to fund that and lay off the risk of the interest rates and stuff. What about one of these other options? Could we do a fixed-rate loan for 7 years instead? Could we do a floating-rate loan? Could you make it safer by pledging some additional collateral.

Give them the option, show them where the line in the sand is. Then they’re making that more informed and proactive decision of saying “Yes, I like that structure and I like that deal. I’m willing to trade my money for that,” instead of just leaving and feeling like “Yeah, I got my loan, but I’m pretty sure I also got ripped off just because of the unknown.” Being transparent, being authentic, explaining the why and the what you need, and help them find a way to get there. Again say “Hey, I’m looking at your business. Here’s what we think the best deal is. Here’s the best fit. Here’s what’ll work best for you.” Solve their problem first, and then they’ll help you come up with “Well, what you’re looking at is just a little short of what the bank needs. Give me some options, I’ll find a way to make it work for you.” They’ll be willing to do that.

First the empathy, then the transparency, and now you’ve got this back and forth discussion where we’re both trying to find a way to make the deal work so that everybody’s happy, we can get the deal done, and a couple years down the road we can do the next deal with a whole lot of trust and understanding.

Jessica Stone

Dallas, to that point about options. We found this great article called The Ultimate Cheat Sheet to Be A Great Negotiator, which we will link to in the show notes for this episode. In that article they mentioned several times how important it is to have options. “Options equal freedom,” is what the author says. Can you explain how that might apply to banking negotiation? I know you touched on that a little bit, but maybe kind of broaden that.

Dallas Wells

Yeah, sure. This kind of goes back to one of those understanding the way that humans make decisions. There is some emotion involved, and I think it’s important that lenders have a firm grasp of how those decisions are made so that they can help borrowers come to those decisions in the right way. When it comes to options, the reason that’s really important is especially in a transaction where things are sort of ambiguous, there’s not a concrete thing. There’s no iPhone you can hold in your hand. It’s this sort of fuzzy thing that exists in a back room around this piece of paper. For them to understand that, there always has to be something to compare it to. When you say “Hey, this million dollar loan is going to cost you 4.5%,” they need something in their mind to compare that to. Is 4.5% a good deal? Well, what am I paying on my house loan? What am I paying on a car loan? What did my buddy, who’s also a business owner, what did he pay on his loan?

Those are the kinds of things where they’re trying to just get a frame of reference in their mind about where that rate stands, and so we need to help them frame that. The best way to do that is to give them some choices, give them some input in that decision. You could just say, again, “Well, you want to pay 4.5. I’d rather you pay more,” and we kind of haggle and come up to this number somewhere in the middle. Again the used car tactic, but you think about all the possible terms that are part of a commercial loan, all the variables that are a part of that deal. They all move the needle for the bank. That means there’s lots of things that we can do to make that deal look different. Give them other things to compare to.

Even when a borrower comes in asking for something very specific, “Hey, I want a 10 year fixed-rate loan at a rate of X.” They know exactly what they’re asking for. Give them a couple of options, say “Yes, we can do it that 10 year fixed-rate at this rate, or we can do a floating-rate loan at this,” so give them something to compare it to. What happens is is that the subtle shift where instead of haggling with you and wondering “Is this guy ripping me off,” now they’re saying “Well, I have something to compare it to. I can look at these 2 things and decide if I like one better than the other.”

Even if all it does is open up that dialogue a little bit more, because you’ve given them some options and some choices they don’t feel so trapped and like they have to haggle on that one thing to make it a good deal. They can decide between the 2 and tell you “I like part A of this one, and I like part B of this one. Can we combine those together?” Now you’re having a constructive conversation about building this custom deal that can really work for both sides, instead of all I’m doing is taking this number around and shopping it between the banks or between what’s in my head as a reference point, and trying to decide if it feels good or if it doesn’t. Really giving that borrower choices and options and freedom.

What that does is it makes this now much more about the full financial picture for that borrower. Instead of being transactional, they’re coming in and bidding a deal basically and trying to bid it to the lowest bidder, the best rate they can get, now it’s about that true relationship lending that all banks are really after. That’s the ultimate end goal, is to be a relationship banker, and whenever they need something they come to you and you figure out the right way to do it, instead of they just bid it around and they have relationships spread all over town, and by relationship it’s just kind of individual spread out accounts. That’s not the best approach for anybody.

This holistic picture comes around from that approach. Give them choices, give them ways to make the deals work, and they’ll feel a lot less trapped.

Jessica Stone

Yeah. Dallas, we’ve talked a lot about kind of approaches and strategies and what to keep in mind, but we’d love to bring this down to a real world application. We’ll start with, do you have any advice for lenders that might be new to the industry, they haven’t done a lot of negotiating, how can they get better at it? Compared to the approach you took just figure it out.

Dallas Wells

Yeah, don’t do it that way. A couple of options. Number one is find somebody who’s really good at it and just kind of watch and learn, stuff goes in just by watching. That’s how I eventually got better at it was, the trial and error takes a long time and it’s really painful. Especially if you’re a lender in a market where there’s only so many options and you stub your toe a couple of times learning to negotiate. As my dad would say, you’re kind of peeing in your own Cheerios. The better approach is find somebody who’s really good at this, who’s done it for a while. Sit in on some negotiations with them, and just listen. Be there only to observe and pay attention.

The second one, that’s really important, is you have to understand the relative value of deal points. I’m not just talking about credit, how much collateral do we need for this thing to be approved in policy, but also the finance side of it. What is the difference between a 2 year fixed-rate and a 10 year fixed-rate, and kind of why, what are the things that go into that? The reason is because these negotiations tend to be very fluid. You’ll start at one point and you’ll end up very far away from that, and you have to be able to at least understand the relative difference of the things they’re asking. Are we in the right neighborhood? Are we getting closer to where we’d like it to be? Are we getting farther away?

You have to learn those things, and that’s something that yeah you’ll just learn it some through just being around the business, but you’ve kind of got to proactively go out and figure those things out. Go to the back of the bank and talk to some of the finance nerds. I’ll tell you, the best place to learn it is learn a little bit about how the bond portfolio works at your bank. I’m sure you’ll have somebody there who would be glad to share some of that stuff with you. Those are financial instruments that are priced much more efficiently, there’s marketplaces for them so you can really see the difference between them, and there’s not as many moving parts at least for the kinds of bonds that banks file. If you understand that, you’ll start to understand the difference between the loan structures. Then when a borrower says “Hey, I need a payment that is no higher than X dollars,” you’ll know a few different options, a few different ways to help them get there because you can kind of back into that based on to get to that payment I’d need this kind of a rate, which means we’re talking about this kind of structure.

The third thing, I would say is just ask for formal training. Most banks, when they think of training lenders, they’re talking about “Hey, let them be a credit analyst for a couple of years, or send them to banking school offered by the state Banking Association.” Those are good things, those are things that you should do, but on top of that ask for the training. Banks should be willing to do that, especially because the commercial lenders are negotiating millions of dollars of transactions every year. They’re the highest profit, they’re also the potentially highest risk for things that we are putting on the books. We should train them how to better negotiate. There’s real dollars at stake there. It’s pretty easy to get positive ROI on that. Just ask for it, and lay out that case and I think you’ll have good luck there.

Jessica Stone

Awesome. Dallas, on the flip side, what about lenders who’ve been in the industry for a while? What do you think they can do to keep their skills fresh?

Dallas Wells

This is the kind of can you teach an old dog new tricks, and really what happens is, and I’ve been guilty of this too, it’s really easy to lose sight of what it’s like on the other side of the table. You do it for a long time, you do a whole bunch of deals, you get better at it so the volume picks up, and you’re juggling a lot of balls. You forget about what it’s like for that one borrower on the other side of the table. We’ve mentioned this before on other episodes but, a banker may be working on 10-12 deals at a time, most borrowers are going to do kind of 3 or 4 big loan transactions in a lifetime. It’s not something they’re doing that often.

Just be understanding, be sympathetic to that, and help walk them through what that process is going to look like. Then you can focus on using your knowledge and your experience as a banker to benefit your borrower. You can be a resource to them, help educate them, help them understand why the deal looks like it does, why it would be better to look a different way, why the bank needs certain things to make it work, help them understand that so that you’re on the same team. You’re both trying to make a deal that works that fits their business, will also fit within the bank’s guide rails. If you’re meeting those 2 things then you’re both winning. You’re growing your loan portfolio, they’re growing their business, everybody leaves happy. Now you’re a resource to them and not an adversary. That’s kind of the outcome that we’re after.

For long-term lenders it’s usually just a reminder, to kind of step back, take a deep breathe, and think about it form your borrower’s perspective rather than your own.

Jessica Stone

Great, okay. I think that will wrap it up for us for this episode, so thanks everyone for listening. We will link out to those 2 articles we mentioned today, and as always you can find those at If you like what you’ve been hearing, please subscribe to our feed in iTunes, Soundcloud, or Stitcher, and we’d love to get ratings and feedback. Thanks for tuning in. Until next time, I’m Jessica Stone.

Dallas Wells

And this is Dallas Wells.

Jessica Stone

And you’ve been listening to LenderPerformance.

The post The 4 Secrets of Successful Lender-Borrower Conversations appeared first on PrecisionLender.


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