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Staying with the original lender is a double-edged sword

Essay 2005 8 Pages

Business economics - Investment and Finance

Excerpt

Table of Content

Abstract

Table of Content

Introduction

Difficulties with Switching Lenders

Private Information

Lender-borrower Relationship

Reasons for Switching Lenders

Problems occurring when Switching Lenders

Case study on Tynemill Ltd

Recommendations

Conclusion

References

Introduction

As large organisations mostly gain finance from the public stock market, the issue of having difficulties changing their lender occurs more to small and medium sized businesses which mainly use commercial banks as their sources of finance (Allen Berger, Gregory Udell). Keeping this in mind I regarded information and research on SMFs more relevant to the topic, which will be the main part of my discussion.

Today more SMFs are unhappy with their current relationship to their lender and consider switching. The main reason for that are difficulties in obtaining finance, unreasonable rates and dissatisfaction with the service provided (Carole Howorth, Michael J. Peel, Nicholas Wilson 2003). Out of 34% firms which considered switching, only 4% actually did (Federation of small Businesses 1998), which shows the enormous difficulties a SMF has to deal with, when looking for a new lender. One of the main reasons may be that they find it hard to communicate previous performance and the availability on credit is mostly based on previous relationships, which enable the lender to gain private information on them. Further several sources of finance might also generate issues to the firms, as borrowing rates are more likely higher as private information is less valuable to lenders because they can not see the whole picture (Mitchell Petersen, Raghuram Rajan).

Overall it seems that firms with good performance, well established relationship do not need to look for other sources of finance because the bank plays an important role in their day to day business, improves the firms economic value (Allen Berger, Gregory Udell) and benefits the bank financially.

In this paper I will evaluate the reasons for these constraints and willingness to switch, look into possibilities and disadvantages of having new lenders and finally make recommendations using a case study of Tynemill Ltd.

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Details

Pages
8
Year
2005
ISBN (eBook)
9783638829052
File size
343 KB
Language
English
Catalog Number
v78051
Institution / College
University of Nottingham – Business School
Grade
67%
Tags
Staying

Author

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Title: Staying with the original lender is a double-edged sword