Excessive Loyalty in Business

Can loyalty in business be taken too far? You bet it can. We call it excessive loyalty.

Many small businesses – especially those run by Christians – view loyalty as a core value. Loyalty to family, vendors, partners, customers and even competitors can be found in most businesses today. But loyalty can be taken too far. Here’s an example:

Jim had been with his bank for 12 years. They had always been good to him and he was clearly loyal to his bank, believing he was receiving better service and outside-the-contract-flexibility on his Line of Credit (LOC) when he needed it. On a $32M business, he had a $4M LOC which capped the inventory valuation portion of the borrowing base at $2.5M, even thought, at times, his current inventory (which would turn in 90 days) could go as high as $7M. Jim’s business fell on hard times through no fault if his own and he found he needed a temporary increase in his LOC to $6.5M. His plan to profitability was both realistic and achievable. It was a good plan. He presented it to his bank. Not only did his bank refuse his request, they asked him to find financing elsewhere and informed him that his line would be called after six months. Jim was surprised. How could they treat him like this after 12 years of loyalty? He had never missed a payment (though his line had not rested in over 8 years) on either his LOC, his business mortgage or his personal mortgage. Jim was taken aback.

So Jim contacted some other banks who valued his inventory differently. They also were willing to give me 80% on his current A/R in his borrowing based where as his current bank was giving him credit for only 60%. Within week, Jim had several offers from other banks with lower rates, higher availability and lower personal guarantees than what he currently enjoyed with his bank. Clearly, Jim needed to change banks.

But Jim didn’t want to change banks. He felt that doing so would violate his core value of loyalty, so he got on the phone with his current bank and talked through a new deal which gave him $4.5M on his LOC at 3% higher than what the other banks were offering. He also agreed to sign personal guarantees that were 5x the amount the other banks were offering. But Jim was able to stay with his current bank and he felt good about his decision because he felt he had lived out his core value of loyalty.

What Jim doesn’t understand is that he was excessively loyal and that there would have been no value violation in changing banks.

Signs of Excessive Loyalty

What can we learn about excessive loyalty from Jim’s (true) story? What are the signs of excessive loyalty?

An Unexplainable Emotional Attachment

Jim wasn’t thinking with his head – he was thinking with his emotions. For some unexplainable reason, Jim needed to stay with his bank, so he willingly, knowingly took a deal that would cost him nearly $90K/year more in interest with the highest exposure to personal liability. This kind of behavior indicates that emotions are running the decision-making process, which rarely renders positive results. You’ll know you’ve hit this point when those outside your business look at the situation and simply ask “Why?”

Relationship Value is tilted in Favor of the Other Party

The deal that Jim struck was clearly in favor of the bank. The bank offered what it felt it could do given the increased risk they observed in Jim’s business. We think they were reading Jim’s business wrong as evidenced by other banks offering Jim much better terms. But whether they were right or wrong, they offered what was clearly in their favor. And they got the deal they wanted. They did not try to strike a “win-win” deal – they struck a “we-win-you-lose” deal. They knowingly did this.

Loyalty is a One-Way Street

When the bank thought that Jim’s business was deteriorating, they didn’t hesitate to restrict his LOC and ask him to find another bank. When a bank does this, it’s not about loyalty – it’s about the bank acting in their best interest. All this marketing today by banks about how they love your business and will be there with you through thick and thin is bogus. They will be with you and your business as long as you’re profitable and represent a low risk to them. Once your business represents a moderate or high risk to them, they will jettison you pretty quick. It’s not personal on their part – its’ just business.

The Way Out

The way out of Excessive Loyalty is to end the relationship. If, in the future, the relationship can be re-established on an even playing field, then fine. But given that Excessive Loyalty is primarily an emotional issue where one’s emotions have become out of balance with critical thinking, we think it best to simply end the relationship and move on.

Bill English

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