ending to friends is more than just the money.
There are years of secrets and togetherness at stake.
I assume you will only explore lending money only if you know this individual for a number of years.
But the bottom line is, loss of money hurts and it hurts bad.
The way out? Approach it like you would any other commercial transaction: difficult, but essential!
Be clear from your side
Ideally, you should have said no, but you didn't.
Before you proceed to dive into your funds, here's a reality check:
- Do you have the finances?
- Are you sure you don't need them?
- Are you comfortable divulging your financial status?
- Will lending the amount cause a rift in your family?
- How much will lending cost you? If it is an interest-free loan, compare it to a competitive market return (remember, if it is an interest-free loan, and assuming you get your money back, it won't cover inflation).
- Are you willing to write off that amount as a gift?
If your answers are leaning towards the negative, do yourself a favor. Say no. You don't want to land in a situation where you end up raising debt thanks to misplaced magnanimity!
But if you have answered all in the affirmative, fine. Proceed, but with the action plan enumerated below:
Investigate
No one likes to be Scrooge. But then, no one likes what is rightfully theirs to be snatched away either!
It is your hard-earned money we are talking about. And even if it is not hard-earned, it is yours. It is your fundamental right to know what the money is being doled out for.
Ask about:
- What the money is required for. You don't want to fund his/ her vague membership bills or hi-fi living expenses, do you? Or, worse, drugs?
- If it is for a business start-up, do the ground work. Just because an idea looks great, it doesn't necessarily mean it is an effective predictor of future earnings!
Benefits
- You will know if the loan is going to be used for something sensible (like a house) or something of return value (like a professional degree or MBA fees). Or not.
- If it is a lifestyle expense, pull the brakes.
Finances -- deliverables and receivables
Start with how you will actually release the loan. The money lent should always been in the form of a cheque.
A cashed cheque is a major proof that you have given the money. Supplement it further by cutting the cheque for whatever it is directly, so you have better control of situation.
Confused? Let's say he needs the money for a medical emergency. Offer to cut the cheque directly in the name of the hospital. This way, you know the funds are not being misappropriated, and you have the debit in your bank statements.
Avoid giving cash. In the event that you have no option but to give cash ensure that there is a witness to the actual tendering of the money. This will resolve future debates as to if the transaction ever took place!
Now, the receivables. How will you get it back?
What payment terms? Are you giving him/ her an interest-free loan?
Principal free? I doubt it, unless you are in the league of Azim Premji.
A flash tip: make sure that even if it is an interest-free loan, you break the principal into a number of monthly installments. This will reiterate the fact that he has an obligation to you and is not a joy ride at your expense.
A smart approach is to create a joint savings account. Ensure s/ he deposits money there regularly. You can then withdraw the amount at predetermined dates. This has multiple advantages -- it avoids the inconvenience of sending reminders if s/ he forgets to pay. You get paid every month, and the credit/ debits leave a confirmation trail.
Get the following cleared upfront:
- A specified due date of repayment.
- Alternate dates if there are insufficient funds.
- If interest is being charged. The rate and structure -- fixed or floating.
- The date on which the finance begins to apply.
Most important, please document this.
Document! Document! Document!Have you ever given a thought as to why everything sign up for in cyberspace, like transmitting credit card numbers, even a rediffmail account, requires your digital signature (or password), and is protected through the use of encryption?
So that your personal and financial information is protected from unauthorised access, use or disclosure.
Money is as (or more) vital as information! So what is stopping you from applying the same prudence here, too?
Have a lending agreement prepared by your lawyer. This will make it crystal clear to you and your friend what the terms and conditions are.
Please ensure that the same is completed and duly signed manually by both of you.
Most important, keep a number of hard copies, and keep them safe! Please don't forget to date the agreement.
Discuss what will happen in the event of business failure. Set limits and parameters, and incorporate those relevant clauses in your legal literature.
Incorporate the payment schedules, which are essentially timelines that describe when payments will be made, and whether those payments go to interest, principal or both as an annexure.
Insist on a promissory note too! A promissory note is a written promise to pay back -- simply put, an I O U. The little note goes a long way as it establishes the amount lent, the parties involved, the terms and conditions, and is an organised dated record of both your signatures!
Remember, the emphasis is to keep your documentation trail ongoing and substantial!
Also, your legal counsel should be an independent party who is not part of the business transaction.
I agree that getting him/ her to put the deal down in writing is the most difficult part.
But be creative. Blame it on your accountant/ prevalent tax laws. Say they are insisting and ensure all this happens before you release the money.
Once the money has flown, s/ he is on his/ her own turf and you will have no control on the situation.
I repeat. Don't be a pushover for mush. A promise sealed over a mere handshake is a pure recipe for disaster!
Benefits- Ensures that your legal terrain is safe. A signed document can be used as evidence in court.
- The signing of the agreement enforces the fact that this is a business transaction to the borrowing parties, and must be repaid as agreed.
Collaterals
Comprehensive documentation will get you to court, but it may not get your money back!
Since neither of us have any intention of scrutinising our judicial system at this juncture, let us suffice with a security till the money comes back.
The security/ collateral can be anything from a house (if you are really blessed), car (strong potential) to even an expensive piece of jewellery (emphasis on a good sale value!).
Typically, a good collateral should cover a major part of your money.
But that may not be possible with his/ her present financial status.
Preferably, look at something whose value won't get eroded over a time frame (a car scores low here). Make sure your pal hasn't promised the same to someone else!
Benefits
Simple: S/ he has something of yours, you have something of his/ hers!
Handhold him/ her through all the possibilities
Sometimes, when we are clouded with financial pressure, we are not able to look at other possibilities objectively. So ensure your friend does so.
Make sure s/ he reviews all finances options in the market. Sometimes you just have to break the nasty habit of having him/ her run to you because your evolution from a shoulder to cry on to innovative money lender is very appealing!
This is not to say you should give him/ her the cold shoulder. In fact, you can help him/ her better. For starters, lenders are particular about the validity and reliability of documentation. Often, the form of finance will be determined by what is available.Help him/ her organise the same.If you know of a professional advisor, connect the two. This could be a reliable accountant or even a solicitor who, in turn, can help him/ her get access to the right fund managers.The reason this is listed last is because the chances of getting your friend off your back without hurting his/ her feelings are rather slim (be realistic!). But hope springs eternal!Benefits
- If one of these sources clicks, the credit department is shifted from you to the bank!
- The commercial lender can also rustle up very innovative repayment schemes.
- And he will love you for running around!
One last word. This article is based solely on one assumption: the money exchanging hands is a significant amount. Please don't draw up a document for a paltry sum!
None of us would have got through our swinging 20's otherwise!
Illustration: Dominic Xavier
