Before you borrow money: why loyalty to a lender is expensive

Adam Hughes, partner in Grant Thornton UK's debt advisory team, still sees founders agreeing to pledge their own home for a straightforward deal, simply because they never widened the search beyond their existing bank.  

This behaviour tends to repeat in the same situations: a business gearing up for acquisition, a management team buying out the founder, or a bank that's stopped keeping pace with how fast the company's growing. Whatever the trigger, the instinct is the same. Pick up the phone to the bank you already use and stop there. 

The comfort of your current lender 

That relationship with your existing bank is already established: no cold call, no pitch, just someone who already knows your numbers. It's an easy, but sometimes costly, default choice. The UK debt market runs well beyond the high street, into specialist lenders and challenger banks, each sized differently and built for different kinds of deals. In my experience, a high-street bank might decline something a specialist fund may approve, or ask for a personal guarantee that a different lender in the same market wouldn't need at all.  

A wider search usually finds more money than the first offer, on better terms. 

I find that many founders ask too few lenders, or their shortlist doesn't fit the size of the deal. Neither shows what the rest of the market could do for you.

Why waiting hurts your negotiation 

Done properly, a funding process usually takes four to six months. Leave it too late and the timeline doesn’t shift, but the pressure does from the lender's side of the table to yours. Your existing bank has its own incentive to keep the relationship rather than lose it: if you start the negotiation early and introduce competition, it compels them to compete to keep you. 

Most founders are still running the business day to day while this happens. Six months into fielding information requests from more than one lender, most realise it's taken far more time and attention than they'd expected, at exactly the point they can least afford to be distracted. 

What a wider search buys you 

I’d recommended starting with an options review: testing appetite right across the market, from the most cautious high-street lender through to challenger banks, credit funds and hybrid capital (a blend of debt and equity). The review shows you what’s on the table, whether that’s more money to grow faster or a smaller, cheaper deal with less risk attached, so the choice is yours rather than the banks. 

I recently worked with a founder whose business was making £1 million in profit and wanted to fund an acquisition. Their own bank would only lend against the deal if they put their home up as security as well. Even then, the facility didn’t stretch far enough, and the covenants were tight enough to restrict what the business could do next. We ran an options review across the market, and the same deal came back with more headroom and no house needed as security.  

Now picture a business looking to buy out a large minority shareholder using debt. If you go to your own bank alone, you’re negotiating with the seller on a number you haven’t tested against the market. That’s risky, as you could overpay to close the deal, or the shareholder could sense how few options you have and hold out for more. If you run an options review across a wider spread of lenders instead, you walk into that negotiation with a real number, backed by the market.  

Ask early, while you still have time  

None of this makes your existing bank the wrong choice. When its terms hold up against the rest of the market, it often still is the right one. I’d just say it just shouldn't be the only one you ask. 

Before you next borrow, be clear on what you want, not just this quarter but for wherever the business is headed next. The debt market is highly competitive with lots of different options available from the cheapest high street option through to a hybrid capital provider where you could potentially sell a small stake in the business to obtain greater and more flexible financing. Most businesses land somewhere in between. I’d encourage you to look properly at what's open to you and build a process around it, rather than relying on a single phone call. Ask more than one lender for a yes, and you'll find out which one's worth having. 

On 24 November, PerfectTed co-founder Levi Levenfiche and our specialists will share the warning signs they’ve seen first-hand as businesses borrow money, so you can spot the risks before they cost you. Register for the webinar now.

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