FREE MEMBERSHIP Includes » ABL Advisor eNews + iData Blasts | JOIN NOW ABLAdvisor Gray ABLAdvisor Blue
Skip Navigation LinksHome / Articles / Read Article


Understanding the Borrower’s Mindset

Date: Aug 03, 2021 @ 05:00 AM
Filed Under: Distressed Situations
Related: Lenders

The borrower says all the right things, but when it comes to catalyzing real change in his or her business, it turns out to be only words. The borrower is in default and has no real intention to make necessary changes. How can a borrower be convinced to continue along a path of substantive, positive change? Millions of dollars are at stake, not to mention livelihoods, relationships and perceived status in the community.

I have encountered dozens of distressed companies in my 30-year career, and one thing stands out - the singular importance of the business borrower’s mindset when confronted with a turnaround situation. When that person is constructively engaging with the company’s constituents, there exists a real chance of getting the proverbial ox out of the ditch. Without this positive engagement, the chances of achieving sustainable change are low.

But borrowers are often resistant to change. Change can be frightening, complex and fraught with uncertainty. It may also indicate condemnation of past decisions. But change is the only way a troubled business can survive. Suppose the borrower’s mindset is one of exaggerated self-confidence, fatal optimism, misunderstood self-efficacy and stoic inflexibility. In that case, the borrower’s mindset becomes a toxic brew that inhibits healthy corporate recovery.

Borrowers will often initially pay verbal homage to the need for change and pledge their support. But once the crisis has seemingly passed, many will revert to the same ineffective patterns of behavior that got them into trouble in the first place. Unfortunately, this is also often true of essential constituents, including lenders. Convincing a borrower that effective change is required in both the short and longer term is an art, and its importance cannot be overstated. The lender must understand that their influence often needs to be ongoing to encourage the borrower to sustain the change process to enable them to access a more appropriate source of capital.

Carefully conceiving and executing these conversations at the outset is critical. Preparation should be thoughtful and thorough, and the stakes delineated in a fashion the borrower can hear. But it should not stop there. Clear commitments, timeframes and accountability are essential components of these conversations that will enable the process to gain real traction. Lenders can play a critical role in initiating change and establishing appropriate milestones, and they must be thoughtful and consistent in how they approach this task.

Psychology of the Borrower

Before we can talk about how to speak to a borrower about the concept of change in language that he or she can hear, we need to understand the person's predisposition to hear our arguments. There is, at best, a limited amount of literature on this subject in the context of turnaround management, and the research that does exist usually involves the appointment of a Chief Restructuring Officer. But what if appointing a CRO is not an appropriate or desired solution? For a variety of reasons, retaining all or a significant portion of senior leadership may be deemed a more viable and productive approach than seeking the appointment of a CRO to take control of operations. Access to deep product expertise, continuity in customer and vendor relationships, and the ability to draw upon the trove of “tribal knowledge” extant in the current leadership team are often compelling reasons for minimizing turnover at the senior level. In such cases, all constituents must work in close coordination with the existing senior management team. To do so, we will need to understand how the borrower thinks.

The distressed borrower in the lower middle market was likely once a successful entrepreneur. These deep roots often remain long after the start-up phase and manifest themselves in the borrower's personality traits and behavioral characteristics. To strengthen the vocabulary we will use to understand this borrower’s mindset, I surveyed some of the relevant literature on the personality characteristics of entrepreneurs – a field more widely researched than turnaround psychology.

Some of the key traits often referenced in entrepreneurial psychology are listed below. Lenders and professional advisors have seen these traits in action and how they impact the borrower’s demeanor and decisions.

  • Aggressive risk taker
  • Optimistic outlook
  • Charismatic leader and resource aggregator
  • Strong Self-Efficacy

When considering how our counterparty might react to challenging news and demands for significant change, it helps to understand the exact meaning of these descriptors. Below are formal definitions we should keep top of mind.

  • Aggressive - vigorously energetic, especially in the use of initiative and forcefulness; boldly assertive.
  • Optimistic - tendency to expect the best possible outcome or dwell on the most hopeful aspects of a situation.
  • Charismatic - personal quality attributed to leaders who arouse fervent popular devotion and enthusiasm: Personal magnetism or charm.
  • Self-Efficacy – measure of a person’s belief that he or she can be successful when carrying out a particular task.

Source: and

We should also consider the abilities our borrowers often lack. For example, an entrepreneurial founder often does NOT possess:

  • An ability to accurately self-assess.
  • An ability to understand that adverse outcomes are possible.
  • An ability to base decisions on objective, detailed analysis (as opposed to a reliance on “gut feel”).

We can therefore understand our borrower to be someone who generally:

  • Will not be inclined to believe the situation is as bad as some describe it.
  • Follows his or her “gut instincts.”
  • Believes he or she is the most qualified leader to confront current challenges.
  • Will be emotionally attached to the assets and individuals impacted by the process.
  • Will oppose external intervention in the affairs of the company.
  • Will respond emotionally to any infringement of his or her desires and attempt to influence others to do the same.

Complicating the equation are two additional concepts. It is also vital that the person delivering the initial message concerning the need for change remains vigilant for indications of how addicted to confirmation bias and motivated reasoning the borrower might be.

  • Confirmation Bias – Unconscious bias that results from the tendency to process and analyze information in such a way that it supports one’s pre-existing convictions.
  • Motivated Reasoning – Emotionally biased reasoning to produce justifications or make decisions that are most desired rather than those that accurately reflect the evidence while still reducing cognitive dissonance.

A charismatic founder often builds a cult of personality around his or her office and role. The leader’s desire to confirm their knowledge, competence and efficacy is so high that it may be a core reason for the need for change. Unfortunately, due to confirmation bias, senior staff have long ago ceased trying to convince the owner that he or she is incorrect in the various conclusions reached, despite possessing the numbers to prove it. I am regularly confronted by comments from senior leaders to the effect that the decision-maker will not listen to well-documented objections and is offended when challenged by the facts. This destructive dynamic can infuse every aspect of the change process, from the quality of information and decisions to the effectiveness and commitment of team members implementing them.

While it is beyond the scope of this article, the individual responsible for evaluating the personalities that will participate in the process should do some additional reading on personality types and the best ways of “getting through to them.” Many assessment tools are available and while I don’t endorse one above any other, simply reviewing the various assessment methodologies available and the suggested ways to approach an individual based on the output of each one will likely deliver essential insights that can enhance the efficacy of communication.

Development and Execution of a Communication Plan

How is it possible to overcome these traits and biases and convince a borrower to support and embrace a corporate renewal process? First, such a process will contravene many of the boundaries associated with the personality traits discussed above and incorporate profound changes to the organizational structure, operating procedures, the roster of the leadership team and possibly even the choices of markets in which the business continues to operate.

To get the message across constructively, we must develop and execute a well-structured communication plan that minimizes opportunities for the borrower to deploy objections based on irrational optimism, avoidance of fact-based analysis, and the distractions of charisma or bombast. The recipient of our message is unlikely to hear our words and thank us for our wisdom. Therefore, we should expect strident objections, each of which will need to be anticipated and tactfully addressed in the design of our communication plan. We should also expect that our counterparty will perceive what we are saying as a personal attack.

The communication plan should begin with a description of the current situation based upon sequenced data provided to us by the borrower that shows the circumstances at the outset of the relationship. In a few pages of summary information, the borrower must see the magnitude of the deviation over time of actual performance from management prepared budgets and forecasts. We will also use this information to explain to the borrower how the lending team perceives these gaps. It’s not just his or her problem, but our collective problem. Brevity is crucial, and we should avoid the temptation to “pile on” with numerous data-intensive pages. The “what” of the matter should be clear.

“Based on Your Data, This Is What You Said You Would Do Compared to What You Have Done.”

Remember, we assume that both confirmation bias and motivational reasoning are operating within the recipient. We will therefore avoid the matter of blame and keep the discussion fact-based. Objections of “It’s not our fault because…” should be acknowledged but not supported. The borrower’s strong self-efficacy will undermine any effort at this point to convince him or her that the issues are his or her fault. Any attempt to place blame will likely be unsuccessful and end up diverting the discussion down a less productive path.

Next, we should clarify that despite the performance shortfalls and related problems with the loan, the current team remains essential to achieving a successful outcome. Indeed, without the active support of the borrower and the rest of the group in a turnaround process, the probability of success is often materially and negatively impacted. References to senior leadership personnel should be kept at the “team” level, primarily because it may turn out that certain team members will not remain with the company. We should avoid any suggestions that a senior leader cannot play a constructive role in the process, even though it may be apparent where problems originate. The borrower’s team will perceive finger-pointing as insulting and react aggressively out of loyalty to each other. Instead, the focus should be on how the situation has changed from one of growth to one of survival.

The plan should then stress that these two situations are fundamentally different. Doing so will lead directly to a new idea - that it is in the borrower’s best interests to collaborate with a third-party expert in responding to the current situation. This assertion will arouse defensive instincts as the last thing that most borrowers want is someone in their midst who will dilute their control of the problem. Objections can be expected, including the time to bring a new resource “up to speed” and the expected high cost of retaining external consultants. There are numerous ways of addressing these objections, which should be considered before the conversation begins.

After hearing responses to initial objections, the borrower will likely again express confidence in their ability to manage the situation with conviction, charisma and optimism. At this point, I have witnessed millions of dollars of value either preserved or destroyed. If the capital constituents fail to stand firm and are not emotionally and factually capable of responding with calm fortitude, it opens the door to failure. The person delivering the message to the borrower should be prepared with an adequate response, possibly resembling the following:

“We realize that your team is very capable. We also understand that you are naturally optimistic. In different circumstances, we saw this as an advantage. After these issues have been addressed, we believe your positive outlook may again be appropriate. But we can all agree that the company’s performance against forecast dictates that a change to the approach based on realism is required. We cannot fall short. Being overly optimistic has put us all in an uncomfortable position. We think the only way to avoid excessive optimism finding its way back into the process is to involve a disinterested third party who can work with you to keep us all on a more realistic track.”

Once this message is skillfully delivered, the next step in the communication plan is to inform the borrower how the relationship will be managed going forward. These changes may consist of the involvement of new people, increased costs, additional documentation requirements and reporting, and regular updates to cash forecasts and operating budgets. These changes should be carefully considered, thoroughly vetted, and fully agreed upon by the relevant constituents – including qualified legal counsel. Circling back later with additional demands will be difficult and result in further delays that may cost the lender a large amount of credibility.

Finally, the borrower should understand that the lender has at its disposal – as a last resort – the “nuclear option” – an ability to withhold additional funding. The “last resort” aspect of this part of the message should be made clear, and the withholding of funding should be structured as a motivator to a specific behavior, not as punishment. The conditions under which the lender will allow additional funding should be laid out clearly and integrated with the achievement of milestones determined by the company and the advisor and agreed to by the lenders. Emotions typically run highest at this point because this may be the first time the borrower has acknowledged that a negative outcome is possible. The realization that the lenders are not simply “blowing smoke” is a powerful one. The way the message is delivered is critical because the borrower may perceive it as one step before the corporate equivalent of an act of war.


There is no “one type” of personality that describes all borrowers or management teams and how they will respond to the challenging news of a change process. Every company and founding entrepreneur have individual characteristics that reside somewhere along a continuum from “none” to “total.” However, in the many situations I have seen, there are some recurring similarities. I have purposefully avoided providing specific guidance across a broad range of personalities because there are innumerable permutations and ways of responding to them.

Instead, I encourage the lender to manage the process by doing the following in an organized and thoughtful way:

  1. Write down the personality traits you have observed in each participant.
  2. Consider how you will address each one – including research on different personality types.
  3. Define what outcomes will constitute success and failure for the initial meeting.
  4. Create a formal communication plan to guide you as you deliver your message.
  5. Bolster the plan with scripted responses to likely questions and objections. Study these responses carefully, so they are “top of mind” without referring to notes.
  6. Understand and anticipate how and when to discuss the nuclear option.
  7. Plan when and how you will end the meeting as this will have a significant bearing on achieving the goal of the meeting.

If approached without proper observation and preparation, the lender may not be prepared to and successfully respond to the mindset of their counterparty. I have seen these discussions devolved into silent, belligerent staring contests - or even shouting matches - that impacted the process in destructive ways. Such an outcome can destroy millions of dollars of value, and thoughtfully preparing in advance can yield outsized economic returns for everyone involved.

Sources & Additional Reading

Astebro, Thomas; Herz, Holger; Nanda, Ramana; and Weber, Roberto A. “Seeking the Roots of Entrepreneurship: Insights from Behavioral Economics.” Journal of Economic Perspectives, Volume 28, Number 3 - Summer 2014, pages 49-70.

Harper, Heather. “The Best Personality Tests in Ranking Order (2021 Update).” Blog Post.

Kerr, Sari Pekkala, Wellesley College; Kerr, William R., Harvard Business School; Xu Tina, Wellesley College. “Personality Traits of Entrepreneurs: A Review of Recent Literature.” Working Paper 18-047, Harvard Business School.

Miller, Kelsey. “10 Characteristics of Successful Entrepreneurs.” Harvard Business School Online Business Insights, 07 July 2020.

Bayard B. Hollingsworth
Managing Director | Phoenix Management Services
Bayard Hollingsworth is a Managing Director with Phoenix Management Services and has more than 20 years of experience managing and advising clients in complex situations. Hollingsworth works closely with clients to successfully identify challenges in their operational, capital and organizational structure. He has extensive experience in the areas of turnaround and restructuring, crisis and liquidity management, operational and profit improvement, strategic and bankruptcy advisory, as well as sourcing and executing M&A opportunities. Hollingsworth can be reached at
Comments From Our Members

You must be an ABL Advisor member to post comments. Login or Join Now.