Staying with the original lender is a double-edged sword (PDF)

Essay from the year 2005 in the subject Business economics - Investment and Finance, grade: 67% , University of Nottingham (Business School), language: English, abstract: This paper deals with the information capture of borrowers due to repeated transactions in their relationship with their lenders. Describing the issue that firms, that are unhappy in their current borrower-lender relationship find it hard to look for new sources of finance. Small and medium sized firms are used as examples because large organisations usually gain their finance from the public trade market.

Describing the reasons for the difficulties of finding new lenders, such as information capture of private information and the need of a well established relationship in order to gain better availability and credit terms.
The factors that affect a firms decision to look for a new lenders are mostly difficulties in obtaining finance, dissatisfaction with the service provided and dependence on banks decisions.
Problems occurring when obtaining multiple sources of finance are lower availability of credit and significant higher interest rates on the credit as lenders fell that their information captured is not as valuable any more.
Included is a case study on Tynemill which shows that a well established relationship may benefit both parties.

I will evaluate why firms find themselves in this unfortunate position of being informational captured and seem to be better off staying with their original lender.