Negotiation strategy
Structural terms negotiation
Structural terms negotiation
Structural terms define how the facility operates: how much you can borrow against your collateral, what triggers protective mechanisms, what assets qualify for funding, and how concentrated your portfolio can be. These terms often matter more than pricing because they determine your operating flexibility.
Advance rates
Advance rate is usually the highest-value negotiation item. Each point of advance rate means $1M more funding capacity per $100M of collateral and reduced equity requirement.
Market benchmarks by asset class
| Asset Class | Typical Range | Top Tier | What Drives Top Tier |
|---|---|---|---|
| Prime auto | 85-92% | 92-95% | Low loss history, liquid collateral |
| Subprime auto | 75-82% | 82-85% | Strong servicing, recovery rates |
| Prime consumer unsecured | 80-87% | 87-90% | Track record, data quality |
| Subprime consumer unsecured | 70-78% | 78-82% | Proven underwriting model |
| Equipment leases | 80-88% | 88-92% | Equipment type, obligor quality |
| Bridge loans | 75-85% | 85-90% | Property type, LTV discipline |
| Trade receivables | 85-92% | 92-95% | Obligor quality, concentration |
How to argue for higher advance rates
Performance data. Show loss rates below market benchmarks. Every 100 bps of loss outperformance supports 1-2 points of advance rate improvement.
Effective language:
“Our cumulative net loss rate of 2.1% is 80 bps below the market benchmark of 2.9%. This 28% outperformance supports an advance rate 2-3 points above market.”
Comparable transactions. Reference specific deals when possible.
Effective language:
“ABC Finance closed a warehouse at 85% advance rate with similar collateral characteristics. Our performance is comparable or better, justifying the same advance rate.”
Seasoning. A portfolio with significant seasoning has less unknown risk.
Effective language:
“Our weighted average seasoning is 14 months. The loss curve is largely realized for this cohort, reducing the risk of unexpected losses.”
Collateral liquidity. If your assets have a secondary market, argue that liquidation values support higher advance rates.
Effective language:
“Auto collateral has established recovery values. The NADA benchmark for our vehicle mix shows 65% recovery on defaulted accounts, supporting higher advance rates.”
Performance step-ups
Accept a lower initial advance rate in exchange for automatic step-ups tied to performance.
Example structure:
| Period | Advance Rate | Condition |
|---|---|---|
| Initial | 80% | Base |
| After 12 months | 83% | DQ below 4%, CNL below 2.5% |
| After 24 months | 85% | Continued compliance |
Effective language:
“We accept 80% initially, stepping up to 85% after 12 months of DQ below 4%. This gives you time to validate our performance while giving us a clear path to improved economics.”
Triggers and covenants
Triggers and covenants define your operating cushion. Too tight, and normal business volatility puts you in technical breach. Too loose, and the capital provider will price in the additional risk.
Calibration methodology
The goal is triggers that protect the capital provider while giving you room to operate through normal volatility.
Step 1: Start with historical performance
Use 24-36 months of data minimum. Identify:
- Peak delinquency rate
- Peak cumulative net loss rate
- Volatility ranges
Step 2: Add volatility buffer
Multiply historical peak by 1.5-2.0x to account for normal business fluctuation.
Step 3: Add stress buffer
Add 20-30% above the volatility buffer for macro stress.
Worked example:
| Factor | Calculation | Result |
|---|---|---|
| Historical peak 60+ DQ | Observed | 3.5% |
| Volatility buffer | 3.5% x 1.5 | 5.25% |
| Stress buffer | 5.25% x 1.25 | 6.5% |
| Proposed DQ trigger | 6.5% |
Effective language:
“Based on our methodology of 1.5x historical peak plus 25% stress buffer, we propose a 60+ DQ trigger of 6.5%. This provides meaningful cushion above our 3.5% peak while protecting your position.”
Covenant types and negotiation approach
| Covenant Type | Typical Level | Negotiation Approach |
|---|---|---|
| Tangible net worth | $X minimum | Base on current + projected growth |
| Liquidity | X months operating expenses | Propose 6 months vs. 12 months |
| Leverage | Debt/equity ratio | Account for facility debt treatment |
| Delinquency trigger | X% 60+ DQ | Calibration methodology above |
| Cumulative net loss | X% of original balance | Based on vintage loss curves |
What to negotiate on triggers
Cure periods. 30-60 days to cure is standard. Push for 90 days on financial covenants.
Effective language:
“We request 90 days to cure financial covenant breaches rather than 60. This gives us time to raise capital or adjust operations without acceleration risk.”
Cure rights. Ability to cure with a cash injection.
Effective language:
“We request equity cure rights: the ability to inject capital to cure a tangible net worth breach within 30 days of notice.”
Measurement period. Trailing 3-month vs. 6-month vs. point-in-time. Longer periods smooth out volatility.
Effective language:
“We propose measuring DQ triggers on a trailing 3-month average rather than point-in-time. This prevents a single month outlier from triggering a technical breach.”
Sunset provisions. Triggers that become less restrictive over time.
Effective language:
“We request that the DQ trigger increase from 6.5% to 7.5% after 24 months of compliance, reflecting the demonstrated stability of our portfolio.”
Eligibility criteria
Eligibility criteria define what assets can be funded. Too restrictive, and you cannot grow your business. Too loose, and you are taking on pool quality risk.
Base case versus exceptions
Establish core eligibility criteria first, then negotiate exception buckets for edge cases.
Example eligibility structure:
| Criteria Type | Base Eligibility | Exception Bucket |
|---|---|---|
| Credit score | FICO 640+ | Up to 10% may be 600-639 |
| Debt-to-income | DTI below 45% | Up to 5% may be 45-50% |
| Documentation | Fully documented income | Up to 15% stated income |
| Loan size | $5K-$50K | Up to 5% may be $50K-$75K |
Effective language:
“We accept the 640 FICO floor as base eligibility. We request an exception bucket allowing up to 10% of the pool at 600-639 FICO when compensating factors exist, such as lower DTI or longer employment tenure.”
Product evolution carve-outs
If you are planning to expand into adjacent products, negotiate eligibility criteria that accommodate that expansion.
Effective language:
“We anticipate launching a longer-term product next year. Can we include loans with original terms of 48-60 months at a 5% concentration limit, expanding to 15% upon mutual agreement?”
Effective language:
“We request a pre-approved expansion of eligibility to include secured loans at up to 10% of the pool, subject to providing collateral documentation within 30 days of first funding.”
Eligibility criteria negotiation checklist
- Base criteria aligned with current production
- Exception buckets for edge cases (5-15% of pool)
- Product evolution carve-outs included
- Geographic requirements match your origination footprint
- Documentation requirements are operationally feasible
- Cure periods for inadvertent ineligible assets
Concentration limits
Concentration limits protect against portfolio concentration risk. The question is how tight is too tight.
Common concentration limits
| Concentration Type | Typical Limit | Negotiating Range |
|---|---|---|
| Single state | 15-25% | 20-35% |
| Single obligor | 1-3% | 2-5% |
| Single industry | 10-20% | 15-25% |
| Product type | 15-25% | Varies widely |
| FICO/score band | 10-25% | 15-35% |
| Original term band | 15-30% | 20-40% |
| Vintage (month) | 10-20% | 15-25% |
Excess concentration haircut vs. hard cap
Some facilities apply haircuts to concentrations above the limit rather than making them ineligible entirely.
| Approach | How It Works | When to Push For |
|---|---|---|
| Hard cap | No assets above limit count | Simple, but inflexible |
| Excess concentration haircut | Assets above limit count at reduced advance rate | Variable concentration levels |
Example haircut structure:
- Assets within concentration limit: 85% advance rate
- Assets 1-5% above limit: 70% advance rate
- Assets 5-10% above limit: 50% advance rate
- Assets 10%+ above limit: 0% (effectively hard cap)
Effective language:
“Rather than a hard 25% state concentration cap, we propose a haircut structure: full advance rate to 25%, 50% advance rate from 25-30%, and 0% above 30%. This provides flexibility for natural variation while protecting your position.”
Concentration negotiation tactics
Align to business reality. If 30% of your origination naturally comes from California, negotiate California-specific treatment.
Effective language:
“Our origination footprint naturally concentrates 28-32% in California. We request a California-specific limit of 35% with a 25% general state limit for other states.”
Use historical data. Show that your concentration levels are stable and intentional.
Effective language:
“Our state concentration has ranged from 26-31% in California over the past 24 months. A 25% limit would constrain normal operations. We propose 35% based on demonstrated stability.”
Structural terms negotiation checklist
Before negotiating structural terms:
Advance rate:
- Market benchmarks researched
- Performance data supporting higher advance rate prepared
- Comparable transactions identified
- Step-up structure drafted
Triggers:
- Historical performance data compiled (24+ months)
- Calibration methodology documented
- Proposed trigger levels calculated
- Cure period and cure right requests prepared
Eligibility:
- Base criteria aligned with current production
- Exception buckets identified with rationale
- Product evolution needs documented
- Operational feasibility confirmed
Concentrations:
- Historical concentration data compiled
- Hard cap vs. haircut preference determined
- Business-specific exceptions identified