To quote Polonius more completely than the title suggests:
Neither a borrower nor a lender be
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
William Shakespeare, ca. 1598, Hamlet Act 1, Scene 3
When Hamlet was first performed in London (probably between 1598 and 1600) the landed gentry were borrowing (from friends) and spending like drunken sailors to maintain their ostentatious lifestyles. So much so that domestic thrift (“husbandry”) had become a thing of the past and the estates of said gentry were being sold off piece by piece to affect repayment of their debts. The first line is sometimes quoted by lenders but it takes old William out of context without the entire quote. Arguably, it is one of the most misused quotes of Shakespeare’s plays (possibly just after “to be or not to be…” and “…my kingdom for a horse”).
Shakespeare is referring to the borrowing from friends and how it can lead to the loss of both the debt and the underlying friendship. Who now would consider where they borrow from a friend? If you don’t you probably should but with the caveat that you should choose your friends wisely.
Bank’s – when they’re operating as they should – provide an invaluable source of cheap debt into the economy. This enables businesses and homeowners to acquire assets with minimal equity. In the case of homeowners, they can acquire a home with (in some cases) only 5% of the purchase price and pay the rest off over time.
With businesses, they can borrow around two times their annual EBIT (Earnings Before Interest and Tax). Over time, banks may become a little more flexible and allow the business borrower a higher multiple.
I was at a wedding reception between Christmas and New Year and – prior to entering inside – was engaged in conversation with a gentleman who managed a successful enterprise (vagueness is required to protect the identity of the gentleman). He maintained that he had a terrific relationship with his banker and freely shared the terms and conditions of his borrowing. His pricing was unheard of. It was a much lower than I could hope to get for him. After picking up my jaw from the floor, I politely suggested to him that I could not match his rates and that he should continue to use his current banker. When he asked for my card, I knew that I had passed the first test.
Once inside, another gentlemen approached me and also asked for my card. He explained that his bank had re-structured about a year earlier and that his relationship manager had been forced to take on many more clients and he felt – after almost 40 years – it was time to change.
When banks cut costs by forcing relationship managers to double or triple the size of their client base, something has to give. It usually manifests itself in the form of lost revenue over time. The poor RM cops it in his/her year-end review and the loss of the client is put down to an underperformance by the RM – not a result of management cost cutting. The banks feel they can do this as, once you sign loan documents, they have your custom. They push the friendship to its limits.
It’s fair to say not all lenders behave in this way. Let’s face it, if banks were still good at relationship management, there would be no need for our services. Where they excel is systems. Never have I seen our local banks so immovable on anything that is not a tick-a-box transaction.
If Shakespeare were around now he may suggest that a lender should allow a borrower to be. What you should do is stop living in the past and forgo any relationship pretence with your bank. They’ve already moved on. They want you to deal with an intermediary (such as a broker). Why? Because they don’t pay us a salary or rental for the CBD space that we may occupy, they don’t provide us computers, insurance, superannuation etc.
They just pay us for the business that we bring in.
So say hello to your new little friend (with apologies to Tony Montana).