Why Some Lenders Secretly Want Your Deal to Fail

Most lenders are honest and hardworking people who sincerely want to help companies through providing capital assistance. They may be better at selling the concept of their capital than actually delivering the needed capital due to their organizational inefficiency or bureaucracy. Nonetheless, these lenders being well intentioned and are looking to lend a helping hand. On the other hand, there are lenders who have an inverted view of what they do and prioritize their need for return in a superordinate manner. While they adopt the relationship framework of a lender, they are anything but a lender and seek to extract maximum value from their position.

These so-called lenders are a wolf in sheep’s clothing and actually benefit more from your failure than they do from your success. If you fail, they can make more money if they own and control the company, bringing them a much higher return. While this happens infrequently, it occurs more than it should, especially among the non-bank lenders such as mezzanine debt and private credit lenders. These lenders usually double as private equity investors and are used to being control investors who call the shots. These organizations begin to think first and foremost as owners rather than lenders, which causes trouble for the company especially if they are struggling. Lenders may believe that management is the problem and that the company’s value is eroding, and that a sale of the company is the only way out for their loan. We have had several clients contend with this scenario because the lender wanted to own the company because they no longer believed in the current owner and management team.

In one case, the lender felt an irresistible urge to own the company because of the lofty market valuations of the industry. Even though they had no ownership rights, they gaslit and belittled the owner into thinking his best option was to sell which he refused to do. They then made his life difficult with consultants, financial reporting requests, and constant check ins to force a refinance, under threat of taking over the company. Had this company not refinanced, the lender’s next step was to attempt to take over control of the company and simultaneously sell. The moral of the story is to make sure you are dealing with good, well-intentioned lenders who see their role as supporting you as opposed to elevating their need for maximum value extraction.