This is always a difficult one to call, because the circumstances can vary so much. But there is one rule of thumb. Can you afford to lose it? If you can’t, don’t do it. There must always be a significant risk in these cases that you will not be repaid.
The emotional pressure is always very great, and this clouds judgement on both sides. Of course, like a marriage, it always starts with optimism and good intentions. What can possibly go wrong? Invariably where lending money is concerned it ends up with broken friendships and estranged relatives, often with a family at war.
So what should you do if you still want to go ahead? This depends very much on the amount of the loan and the purpose.
Is it a loan to set up a business, expand a business, or keep a business afloat? If it is what sort of security can you get for the for the loan? If it is to a limited company, then you are well advised to get personal guarantees from all the directors. But of course the directors may be wothless. You may be given shares in return for the loan, but shares in private limited companies can often turn out to be worthless. You are better having a straightforward loan guaranteed by the directors. It may also be wise to have some sort of security on the assets of the company. But none of these guarantee you will be repaid.
If the loan is to a partnership, then you should obtain personal guarantees from all the partners.
With a loan to a business you should get legal advice on the terms of the loan and security. You should investigate the financial position of the business and its directors or partners. You need to go into this with your eyes wide open. It is vital that the loan agreement is set out in a written document signed before the loan is made. So the bottom line is to take legal advice as quickly as possible. Be business like.
If the loan is a personal loan not connected with a business, you should take similar precautions. You should have the terms clearly set out in writing and signed before you part with any money. You need to be clear on the amount of the loan, when it is to be repaid, what if any interest is to be paid, and any security to be provided. Each party should have a copy or the signed agreement. All payments and any letters or e-mails should be recorded and saved. Documents are vital to protect each side. Again, it is highly recommended that you get legal advice on anything but the smallest loans.
Don't part with any money until you are sure of your position and you have a signed agreement setting out the terms in clear language.
Above all, do not rush into a loan with your eyes closed. It may be friends or family, but you have to be business like or you will most likely lose your shirt and start a war.
Nigel Musgrove
Business and Litigation Solicitor
0845 003 5639
This blog is not intended to constitute legal advice, nor is it intended to be a complete and authoritative statement of the law, and what we say might be out of date by the time you read it. You should always seek legal advice to confirm whether or how any information in this article applies to your particular situation. We offer a free telephone consultation to discuss your particular circumstances.