It’s not exactly uncommon to hear of business relationships turning sour whenever the question of lending and repaying money comes up. There might also be occasions where you decide to lend a friend or colleague money. However, before doing so, it’s important to think about how it might affect that relationship should there be any issues with repayment. If you decide to lend money to someone, then it pays to keep the following in mind:
Lend what you can afford to lose
Career gamblers will always tell you how you should never take on bets you can’t afford. Well, the same principle applies to lending money to a dear one.
Do a quick review of your finances and ask: “Can I afford to lose this amount or write it off in case good ol’ Uncle Martin can’t pay back the debt?”
You’re certainly under no obligation to say “yes” without blinking, but if you realistically think that non-payment will not be an issue, then go ahead.
Come up with some repayment terms
Sometimes, lending someone money is not a matter of: “Okay, here’s 100 quid, you can pay me back over the weekend”.
For larger amounts and especially for the sake of maintaining a healthy relationship, you should always discuss the loan terms.
This will typically include when the repayments will occur, the frequency, and how your customer will repay any interest and principal (if you’re charging it, that is).
Take some collateral
We’ve seen this happen all too often: someone asks you lend them some money. You reluctantly agree, but when the borrower disappears, you are left dumbstruck, not knowing what to do.
It’s wise to take a little collateral. This could be anything from a watch or laptop to their spare company car keys or even a small business asset like a photocopier machine – it depends on the amount you have lent. If the borrower defaults, guess what? You get to keep the collateral.
Have them sign off a note
A promissory note is actually a legal document that borrowers must sign once they agree to the lending and repayment terms. It’s an acknowledgement that the loan has been given and that the borrower is pledging to repay it.
Promissory notes will typically include:
- The terms of the loan
- The interest rate (if you’re charging any)
- The repayment schedule, timescale, frequency, etc.
- Any fees you will charge them at various points for making late payments
No need to micromanage
Once a deal has been agreed to and inked in paper, the funds are no longer under your control.
You should definitely follow up from time to time, especially if the borrower is late on their repayments, but you shouldn’t henpeck them about their general finances – it will only breed resentment.
If you’ve lent a sum of money to someone and they keep dodging the bullet every time you ask them to pay it back, help is only a phone call or email away: 0151 526 4222 or admin@cobrafinancial.co.uk. Our debt collectors can advise you on the next steps if you are having trouble collecting unpaid debts.
