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Is it a conflict for lender to buy services from borrower?

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Is it a conflict for lender to buy services from borrower?

As a community economic development lender, is it a conflict of interest for us to engage our lending clients (a) to work for our organization and (b) to work as technical assistance providers to other clients? We have an interest in their success.  This isn’t covered by our conflict of interest policy.

This is a question not covered by any conflict of interest policy that I am aware of.  Conflict policies traditionally apply to transactions between the organization and the individuals making decisions on behalf of the organization, not to conflicts between the organization and unrelated third parties.  Assuming that none of your decision-makers is affiliated with the borrower, the conflict policy would not cover this situation.

It is obviously a potential conflict of interest for the organization to utilize the services of a borrower (or grantee).  But unless there is some specific regulation governing your lending activities, I am not aware of any general legal prohibition on making a loan and then purchasing the services of the borrower for your own needs or for others.

It is more a question of fiduciary duty for your decision-makers.  Since it is presumably within your mission to support the kinds of organizations to which you make loans, this purchase of services would be consistent with that mission.  It could be good for your mission if you do so, but it could also be good-money-after-bad if your purchases don't prop the borrower up enough to repay the loan.  Your decision-makers have to decide whether the relationship is worthwhile for your organization.  Your decision-makers have a somewhat different issue if you are buying services for your other borrowers, particularly if the service provider isn’t very good at what it does.

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Tuesday, March 20, 2018

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