Shake On It

Personal relationships matter in lending

A man and woman shaking hands while sitting on a rocket fashioned out of a 100-dollar bill. The rocket is pointed upwards.

Numbers are important when it comes to loans. Lenders look at companies’ financial statements and loan history when determining interest rates or loan terms.

But in the competitive landscape of loan acquisition, it’s not just about crunching numbers. Loan officers and borrowing managers are people, after all, and those who do repeat business build relationships. New research co-authored by Asst. Prof. Omri Even-Tov shows that the soft information accumulated in these relationships can reduce the costs of screening and monitoring and thus reduce the cost of debt.

“These relationships foster trust and reduce information gaps, allowing lenders to gain valuable information about a borrower’s sense of responsibility and overall creditworthiness,” says Even-Tov.

In fact, established relationships between loan officers and borrowing managers not only increase the likelihood of a loan but tend to improve loan conditions for the borrower without increasing risk for the lender.

Using a sample of loans from 1996 to 2016, Even-Tov and his colleagues compared one-off interactions with loans conducted by the same parties. In established relationships, the borrowers saw better interest rates and the lenders got better screening and monitoring as evidenced by fewer rating downgrades.

They also found that when a borrowing manager and loan officer left their jobs, the two firms were roughly 70% less likely to engage in business together.