Loan-to-Own Lenders

Loan-to-Own Lenders Use Debt To Take Control of Your Business

Growing a business often requires capital, and there are two primary ways to raise funds:

1. Selling equity (giving up a percentage of ownership)
2. Taking on debt (borrowing money through loans)

Many entrepreneurs avoid selling equity because they don’t want to dilute their stake or lose control of their company. Instead, they opt for debt financing, assuming they can maintain ownership while fueling business growth.

However, what seems like a safe financing option can quickly turn into a trap, especially if you’re dealing with loan-to-own lenders.

How Loan-to-Own Lenders Take Control of Businesses

Not all lenders are created equal. While traditional banks aim to profit from interest payments, some specialty lenders have a different strategy: loan-to-own.

What Is a Loan-to-Own Strategy?

A loan-to-own lender provides funding with ulterior motives, they aren’t just looking for repayment. Instead, they hope your business will struggle so they can:

• Force you into default and seize control of your company.
• Convert debt into ownership through debt restructuring.
• Use bankruptcy proceedings to eliminate existing shareholders and take over.

Example: How Debt Can Lead to a Takeover

Imagine a business with:

• An equity investor who has $30 million in shares.
• A lender who has $10 million in debt.

If the company enters Chapter 11 bankruptcy, the lender has legal priority over equity holders. The result? The lender can take over the entire company because the debtholders have many more rights than equity holders, leaving the original owners with nothing.

This is why debt financing can be riskier than selling equity because loan-to-own lenders can legally maneuver their way into full control.

Signs You’re Dealing with a Loan-to-Own Lender

Before taking on business debt, be on the lookout for these warning signs:

1. High-Interest Rates and Hidden Fees
2. Aggressive Debt Covenants
3. Push for Debt Consolidation

1. High-Interest Rates and Hidden Fees

Loan-to-own lenders often offer expensive financing with:

• Above-market interest rates
• Balloon payments (large sums due at the end of the loan)
• Strict late payment penalties

2. Aggressive Debt Covenants

They include strict conditions that can trigger a default, such as:

• Restrictions on new business investments
• Mandatory revenue or profit thresholds
• Provisions allowing them to demand repayment if business conditions change

3. Push for Debt Consolidation

Some lenders will offer to refinance your existing debt, making it seem like a better deal. But in reality, this consolidation could:

• Give them more leverage over your finances
• Place all your debt under their control
• Make it easier for them to seize your assets

A Real-Life Case: When Debt Became a Trap

A CEO I recently worked with took on significant debt to fund business expansion. At the time, the company was thriving.

However, when the industry cycle shifted, profits declined, and loan payments became difficult to maintain. His lenders quickly:

• Increased pressure to restructure the debt.
• Threatened default unless he followed their terms.
• Positioned themselves to take over the company at a fraction of its value.

Now, he’s stuck and unable to pay off the debt and at risk of losing his company.

How to Protect Yourself from Loan-to-Own Lenders

1. Research Your Lender Before Taking a Loan
2. Watch for Debt Covenants That Limit Your Control
3. Have a Backup Plan for Debt Repayment

1. Research Your Lender Before Taking a Loan

• Are they known for turnaround acquisitions?
• Have they previously taken control of distressed companies?
• Do they have strict default clauses that favor them?

2. Watch for Debt Covenants That Limit Your Control

Ensure that the loan agreement doesn’t give lenders too much power over decisions such as:

• Raising capital
• Expanding operations
• Changing management

3. Have a Backup Plan for Debt Repayment

Before taking on debt, create a realistic financial strategy to ensure you can pay it off without jeopardizing your business ownership.

Debt Can Be More Dangerous Than Equity

Many entrepreneurs avoid selling equity to maintain control, but loan-to-own lenders use debt as a tool to seize businesses at a discount.

Before signing any loan agreement, understand your lender’s true intentions. Sometimes, selling a small equity stake is far safer than taking on a risky loan.