# Lending Money To A Friend



## MrEarl (28 Mar 2018)

Hello,

A friend has asked me to help him out with a short term loan. He wants the money as additional working capital to aid growth in his small, but established, cash generating business.

He has had a previous business fail, so has a damaged credit record and a judgement outstanding. He is making small regular payments at an agreed rate, against this historic debt.  For this reason, traditional lending institutions are not an option for him.

While my first instinct would typically be to avoid getting involved in lending money to friends, I am tempted to try and help on this occasion.  However, before I go any further, I am wondering:

- how do I document an agreement between us, without appearing to be some form of private money lender ?

- if things go wrong, are such documented agreements enforceable by law ?

Needless to say, I am talking about a large enough sum that I would like the loan agreement documented, but equally I appreciate that if he fails to repay then there's a risk that I'll never see my money again.

Many thanks,


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## T McGibney (28 Mar 2018)

MrEarl said:


> - if things go wrong, are such documented agreements enforceable by law ?



What good is recourse to law to enforce a debt that he won't be able to pay if he hasn't any money?


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## newtothis (28 Mar 2018)

I can't answer the legal aspects of your question, but I'd make the following observations which might help:

-  "then there's a risk that I'll never see my money again" - the risk is very significant, regardless of what you are being told. You should not do this unless you can afford to lose it all.

-  Think it through: how will you react if the cash is not repaid?

-  No amount of paperwork or legal agreements will do much to protect you if things do go wrong

-  Ask to see audited accounts (or at least some prepared by an accountant if the business is audit exempt) for the business: Also, 6 months bank statements and up-to-date management accounts. Any loan provider would ask for these, so why not you. If these are not forthcoming, walk away. If they are not willing to share these with you, there is something to hide.


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## T McGibney (28 Mar 2018)

newtothis said:


> -  Ask to see audited accounts (or at least some prepared by an accountant if the business is audit exempt) for the business: Also, 6 months bank statements and up-to-date management accounts. Any loan provider would ask for these, so why not you. If these are not forthcoming, walk away. If they are not willing to share these with you, there is something to hide.



A guy like that won't have audited accounts. Management accounts etc won't be worth the paper they're written on.


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## Palerider (28 Mar 2018)

Could you sign a letter of guarantee for him, he would have
the onus to repay and you as guarantor would strengthen the application.

All that said I would not do it, I gave been down that road, never saw my money again.

A friend in need of cash is a friend you don't need.


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## RedOnion (28 Mar 2018)

Hi @MrEarl 
Is the business as a sole trader, or a ltd company?


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## Brendan Burgess (28 Mar 2018)

Hi MrEarl

You should do up a simple enough document signed by him acknowledging that it's a loan  and what the terms and conditions are.  

Agree with newtothis though that you will have to be prepared to lose the money and the friendship. 

If he has a property, then you could ask a solicitor to structure the loan as a mortgage on the property. 

Whether it's a company or a sole trader, you should make it a personal loan to him. That makes it much simpler. 

Unless the company has some asset you can take as security.

Brendan


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## Ravima (28 Mar 2018)

DON'T


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## newtothis (28 Mar 2018)

T McGibney said:


> A guy like that won't have audited accounts. Management accounts etc won't be worth the paper they're written on.



A bit presumptuous, no? All we know is it's a small business. Anyway, my suggestion was to ask for them: whether or not they exist and the state they're in tells its own story. They can of course be complete works of fiction, hence the suggestion to look for bank statements too. If they don't exist or look dubious a good excuse to say no, as the risk gets into the stratosphere.....


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## Gordon Gekko (28 Mar 2018)

Hi Mr Earl,

Would you be better off investing in the business?

Gordon


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## dub_nerd (29 Mar 2018)

Have been down this road before too. Friend needs some money "for working capital / for a temporary cash flow problem / whatever". You lend it and then discover he's in dire straits. Also think about it -- he has various financial commitments, one of which is the repayment of an interest free loan. Which one do you think will be absolutely rock bottom of the priority list? Not saying don't do it, just be aware of what you are getting into, and as other have said: be prepared to lose the money and the friendship. One of my similar ventures that I would say has gone relatively _well_ -- a ten month loan of a substantial amount of money guaranteed to be repaid from an insurance payout that was on the way -- I've recovered most of the money but just coming up to the ten _year_ anniversary of the loan. Have had some others that didn't go so well.


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## T McGibney (29 Mar 2018)

newtothis said:


> A bit presumptuous, no? All we know is it's a small business. Anyway, my suggestion was to ask for them: whether or not they exist and the state they're in tells its own story. They can of course be complete works of fiction, hence the suggestion to look for bank statements too. If they don't exist or look dubious a good excuse to say no, as the risk gets into the stratosphere.....



Presumptuous? Maybe, but everything is to some extent presumptuous on forums like this where none of us are in possession of all the facts pertaining to a given situation.

In my experience, struggling and cash-strapped small businesses rarely spend whatever few cents they can muster on reliable management accounts, let alone audited accounts.

If this guy has spent money on elaborate management accounts while at the same time carrying large legacy debts, the question of priorities arises, most specifically in the form of a suspicion that the purpose of procuring such accounts was to prime the business for sale or outside investment.


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## elcato (29 Mar 2018)

What age is the guy and will he eventually get an inheritance (family home perhaps) ?  This would be the way I'd be thinking in the long run.


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## newtothis (29 Mar 2018)

T McGibney said:


> If this guy has spent money on elaborate management accounts while at the same time carrying large legacy debts, the question of priorities arises, most specifically in the form of a suspicion that the purpose of procuring such accounts was to prime the business for sale or outside investment.



Maybe we're at cross purposes. My view of management accounts are the day to day record of what's going on; nothing elaborate involved. I've run a couple of small businesses and I'd feel very exposed if I couldn't get a very acurate picture at any time I wanted of cash within and owed to/from the business.


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## T McGibney (29 Mar 2018)

newtothis said:


> I'd feel very exposed if I couldn't get a very accurate picture at any time I wanted of cash within and owed to/from the business.



Then you'd need a bank reconciliation (no tall order these days with the demise of cheques) and simple debtors and creditors ledgers.


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## MrEarl (29 Mar 2018)

RedOnion said:


> Hi @MrEarl
> Is the business as a sole trader, or a ltd company?



Sole trader.



T McGibney said:


> What good is recourse to law to enforce a debt that he won't be able to pay if he hasn't any money?



Because he may have in the future, just like he managed to get another small business up and running, having had a historic issue.



Palerider said:


> ....A friend in need of cash is a friend you don't need.



Appreciate the point you are making, but that's not always true.

The other suggestion about the guarantee would not work btw, but good idea.



Gordon Gekko said:


> Hi Mr Earl,
> 
> Would you be better off investing in the business?
> 
> Gordon



Nice idea, but not an option on this occasion.



elcato said:


> What age is the guy and will he eventually get an inheritance (family home perhaps) ?  This would be the way I'd be thinking in the long run.



Not beyond possibility as a way of getting repaid, if all else failed.


*Many thanks to everyone for the responses to date*



.


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