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What to consider before lending money to family and friends
When your best friend views your
nest egg as a source of start-up funds for his latest business venture, or your
nephew hits you up for a car loan, your first impulse may be to reach into your
bank account to help. But it's a fact that loans to family and friends often
end up straining both finances and relationships. As Shakespeare said,
"Loan oft loses both itself and friend." In other words, if you lend
money to friends, you often don't get paid back, and the friendship itself may
disintegrate.
It's best to consider a loan to
someone you love as an "arm's length" transaction. If you're
pondering such a loan, keep the following in mind:
* You can just say "no."
It's your money, after all. Do you really want to raid an emergency fund or dip
into your child's college account to finance a friend's business idea? Think
like a bank. It's reasonable to ask tough questions about the person's bank
accounts, potential sources of income, planned use of loan proceeds, and
spending habits before extending credit.
* Consider a gift. If you're
comfortable sharing your resources, you may want to provide a monetary gift
with no strings attached. In many cases, this is the best solution because
neither you nor your friend expect the money to be paid back. Unlike a loan, this
type of arrangement can forestall misunderstandings and hurt feelings later on.
Of course, you should not give money if doing so would unduly strain your own
finances.
* Formalize loans. If you decide to
lend more than a small amount to a friend or family member, it's generally best
to draft a written agreement. This can be as simple as filling out a promissory
note (available online or at office supply stores). Such forms spell out the
basic terms of the loan -- amount, interest rate, payback period -- and provide
some limited protection should you and the borrower end up in small claims
court. Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans between
family and friends. For a fee, such sites can prepare loan documentation, send
payment reminders, issue regular reports, even facilitate electronic fund
transfers. If the loan involves a significant amount of money, check with your
attorney.
Remember: Many personal relationships
have been damaged when loans go awry. So proceed with caution.
Posted in tax
If the current job market has you thinking about starting a
business of your own, take some steps to increase the odds that your business
will succeed.
* The first step is an honest self assessment. Common
characteristics of a successful entrepreneur are the drive to achieve and the
willingness to take risks. To succeed in business, you need good organizational
and people skills, confidence to make good decisions under pressure, and the
emotional and physical endurance to work long hours. Experience in the type of
business you're planning is a major factor.
* Take the time to do your homework. A business is more
likely to fail if you're in a hurry to open the doors. Consult trade
associations, other successful business owners, governmental agencies, and
professional advisors for information relating to your new business. Is there a
demand for your type of product or service? If so, who will your customers be,
and where should you locate in order to be easily accessible to them? How will
you set your prices to attract customers, yet maximize profits? How will you
make your business stand out from the competition?
* Look for ways to limit your overhead expenses. For
example, determine whether you should lease or buy your premises and equipment.
If you only need an office to meet with clients, consider places that rent
space on an as-needed basis and furnish secretarial help and equipment. Check
out the benefits of an enterprise zone, where taxes and even the cost of
utilities and phone service may be lower.
* Incorporate your research into a business plan. Have your
accountant assist you with this. Chances of obtaining the necessary start-up
capital improve if you have a clear business plan.
Opening a new business is the dream of many people. For
guidance that can help improve the chances of success for your venture, give us
a call.
Last Updated by Noel Dalmacio on 2012-09-26 10:17:36 AM