For Better Loan Terms, Find a Partner

Companies in strategic alliances get better access to financing and more desirable terms

Based on the research of Urooj Khan

Shoppers browsing through blouses and blenders at Target know they can also quaff a cappuccino at one of more than 1,700 Starbucks cafes housed within Targets. The strategic alliance benefits both corporations by helping them reach new markets, boost their brands, and add incremental sales.

Collaborative partnerships such as this have grown at a pace of 3,600 per year, according to the SDC Platinum database. That’s partly because companies in alliances can gain access to new technologies and customers while keeping their autonomy.

New research from Texas McCombs highlights another advantage of alliances: They also make borrowing money easier.

Urooj Khan, associate professor of accounting, finds that companies entering strategic alliances can get both better access to financing and better terms through the financial networks of their partners. Banks that have already lent to one partner offer lower interest rates to a company entering the alliance.

The reason is that having a relationship with one partner helps them get insight into the other company, beyond what’s found in financial statements and alliance agreements, such as the strength of its commitment to the alliance and its ability to execute the alliance effectively. Such inputs are critical for assessing the credit risk of a borrower.

“It’s really hard to see whether a company will live up to its strategic alliance commitments, even if they put it on paper,” says Khan. “But these alliances have significant consequences for the companies’ financial futures, cash flows, and revenues.”

Knowing that an alliance can improve a company’s bottom line, banks can lend with less uncertainty, he adds. They can spend less on screening and monitoring, making it possible to extend a lower-interest loan to the new partner.

With Vincent Yongzhao Lin of Washington University in St. Louis, Zhiming Ma of Peking University, and Derrald Stice of Hong Kong University, Khan analyzed 5,343 U.S. bank loans issued to 1,254 borrowers in strategic alliances from 1991 to 2016.

The average company got loans from banks that had existing relationships with an alliance partner, as well as other loans from banks that did not. That allowed the researchers to compare lending outcomes. They found that in the four years after an alliance commenced:

• Borrowers in alliances were 6% more likely to get financing from alliance-related banks than from non-alliance-related banks.
• Interest rates on loans from alliance-related banks were 0.13 percentage points lower, on average, than loans from banks with no alliance connection. These cost savings represented a 7% decrease in the average cost of borrowing.

Alliance-related banks gave even more favorable rates when:

• An alliance was economically important, as measured by its closeness to the company’s core businesses, similar markets for the partners’ products, or the equity markets’ reactions upon the alliance’s announcement.
• The borrower’s transparency and accounting quality were low, making inside information from its partner even more critical to assessing its risk.

The findings have implications for banks and for companies considering entering a strategic alliance, Khan says.

Banks can look at new alliance partners of their existing clients as avenues for potential business growth.

For companies — especially those that anticipate needing a loan — the findings can help them decide whether to pursue an alliance in the first place.

“Companies typically consider access to new markets and technology or cost savings as the main benefits of forging strategic alliances,” he says. “Our research shows that partners can also benefit from each other’s financial networks through alliances.

“Thus, the quality and extensiveness of a firm’s banking relationships is an important factor in choosing an alliance partner.”

“Strategic Alliances and Lending Relationships” is published online in The Accounting Review.

Story by Deborah Lynn Blumberg