Have / Would you borrow or lend money to/from a friend for a business?

[Judy]

My lifelong attitude has been, I won't loan to anyone unless I don't mind not getting it back. I once loaned $100 to a close friend who was killed the next week, back when gas was around 20 cents a gallon.

If the borrower can't get it from a bank or similar, it's probably not a good risk.

 

[cheri222]

Never lend more that you can afford to lose. That said, never again.

 

[suzettex5]

Thats a really tricky situation. In most places, a bank WONT loan $ to a start up business, they expect to see purchase orders and an already existing line of credit somewhere to prove you are a good risk. Otherwise, it usually just doesnt happen. Same with grants for starting a new business, very, very hard to get.

I would ask the person for a full on business plan, earnings projections, debt repayment plan, a very decent sized stake in the company, and definatley have legal docs drawn up. This economy is pretty darn tough right now and 30 grand is NOT something to take or give lightly (not that your friends are doing that).

90% of all new business' fail in the first year, which is a very high risk to the lender, and that means probably no profits for the first year (at least) to even begin re-paying the loan.

Personally, if I was loaning that kind of money, I would treat it as any other business venture- explain to the lendee that this is a business transaction outside of the personall relationship and it will be treated as such. If some kind of colateral is not available, I would be leery. It would have to be one HELL of a business. Honestly, 30 grand isnt much to start up a business, but maybe they have other $? A low cost for start up usually means low returns, so I'm not sure it would be worth it to me.
I would also ask who else they have gone to for funding, and why anyone else has said no.

Also, the lenders really need to ask themselves, Are we really wanting to go into any business right now? And they will be in business, if just because they will be concerned with when they will be re-paid, or what their returns will be, and when. They will want to know whats going on with their money at some point.

A bad loan can be write-off tax wise, but can also become a tax burden if they become successful. Are they ready to be part of a corporation? Are they ready to accept financial responsibility if someone has a bad experience with the new business and sues? (yes, if they loan $, they will be implicated in any lawsuits by the lawyers, its just how biz is).
Have they considered that they will responsible for part of the corporate taxes if they become vested/named partners? Not to mention, if they do become a stock holding partner, they will be held responsible as owners of the corp if anyone else screws up (more tax implications).

Its not about 'being good for it', if they were, they would already have the $ themselves, or would have planned this biz out for enough time to have maybe saved the $ to start it up. If the biz fails, how are they gonna pay it back, if they are having to borrow it in the first place?

Critical thinking and far forward planning are very crucial for anyone starting a biz right now and for anyone wanting to get involved with a start up. If the person lending is mostly going by 'feelings', that, in my opinion, is a very BAD reason to loan money to a friend, family memeber, or anyone else. The decision should be based on solid plans and a very detailed business plan that goes at least 3 years into the future with realistic projections (not just 'we hope to be at this number' projections).

Anyhow- thats my .50 (sorry I went on so long, my hubby and I are in the biz world and have to deal with investors on a daily basis

)

 

[debilorrah]

Hard fast rule I follow when it comes to friends and money: If I have it loan, I have it to gift, so give it to them.

 

[Nifty-Chicken]

Lots of good comments and feedback. It is especially interesting to read from people with first hand experiences!

I just noticed I left out a piece. She's not only doing it to "help" her friend, but she says he is going to pay 8% on the loan for two years and is expecting to probably pay it back earlier.

 

[debilorrah]

Quote:
As with any other type of a loan, there is always the chance the person will default, especially if the business fails. Not knowing these two people, your friend may want to keep in mind that because they are friends, the payment may not be at the top of the list of priorities.

 

[elizabethbinary]

No and no, even with "interest". We had an all out family feud that started over a $200 "loan" to my husband's brother here. Suddenly f-bombs were being thrown around and two sides of the family split.. over PETROL MONEY. It was chaotic.

And then the time we helped a guy get a house and it ended with cops at our door at 6am. Don't ask.

...you know, I kinda wonder why I keep doing it. I guess at this point I figure I have it, I'll just let it go. I definitely don't expect anything back from anyone ever, though. When it happens, it's really nice.

 

[Buugette]

I was told never to loan money that I couldn't afford to lose.

D

 

[suzettex5]

Quote:
8% is crap, honestly. He can 'expect' to pay it sooner, but only time will tell, so your friend should not bank on that being reality. I would ask for at least a repayment of the loan in 2 years, as well as a 10-20% stake in the company. That is more fair for such a leap of faith. It is a very difficult thing to be in business, there are ALOT of things that need to be taken care of, and the lender can only HOPE all those things are done, and done right, to prevent the business from collapsing.
I mean, if she's just being nice, ok, but these kinds of things REALLY have a way of changing how you feel about people. I dont think its a wise 'investment' to just get repaid and get 8% interest. Not to mention, she will have to pay taxes on that interest, so the loan ends up costing HER money- how is that a good deal????

When we (my hubby and I) borrowed only 20 grand from family, it was with paperwork, and plan to repay, accompanied by a business plan, as well as a promise to re-pay the original loan AND a profit to the lenders of 500,000.00 (yes, half a mil). But, they pay the taxes on their $, and we pay ours on our $, so they still come out ahead.

To me, bottom line is, she should either just gift them the money, or be prepared to be a vested partner in their business, with all that entails (silent partners are still legally held responsible for corporate acts though).

If your friend is ok with losing the $, and is ok with no documentation (bad, bad, idea though), then she should go for it, AFTER she talks with a lawyer about any possible implications she may face.

If the biz is sooo good that she cant resist investing (she IS investing, not 'loaning', unless she documents it as a personal loan to the people themselves), why wouldnt she want to make the best possible financial decision and get PAID for her risk?

Far, far to many people have lost tons of money based on 'feelings' and the desire to just 'help'. Business is a cold hard thing most of the time- it doesnt have feelings. If you respect it as such and treat it as such, all parties are usually much happier (and much more profitable).

If the people needing the loan cannot respect the lenders need for documentation and a business plan from them, I would run far and fast. They are not proffesional or serious, and therefore not worth the monetary risk. If she is gifting the money- she cannot legally call it a loan, and therefore cannot collect interest, also, she cannot legally write off the money if they fail to re-pay (if she calls it a gift, a loan or investment is different). She REALLY, REALLy needs to look into the ramifications to herself no matter what she calls the money. A bad loan can be wrote off, a gift cannot. A gift CANT collect interest or it would HAVE to be called a loan in order to be legal. She should talk to a tax attorney to be sure of the laws where she lives and make sure it does not mess with her income brackett either.

Owing friends/family $ is NOT a good feeling, no matter how optimistic you are about your business. Having to be around someone you know owes you alot of $ is not a comfortable thing either. But when you all know you are all working towards a common goal, that can go along way to easing tensions. Consider being paid as a "Consultant' for a specified period of time after the debt is repaid- she pays her own taxes, is not part of the company, but can be guaranteed income of a specifc amount for a specific time frame. Just an idea...

 

[DuckLady]

I am in the middle of getting a yarn shop started here.

I am paying cash. If it means I have less of a variety of yarn or that I have to rent a small space in an existing shop, then work up to having my own retail space, then that is what I have to do.

I don't want to take out a small business loan or ask anyone to finance me.

If person #1 is good for it, Rob, then why aren't' they talking to a bank?