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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
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Business - Avoid growing pains in your business
One way to kill your business is to grow it too fast. Many
profitable small businesses have expanded at the wrong time and at the wrong
level of increased costs. The result is that they never again make a profit.
How does this happen?
A given amount of building, equipment, employees, and the
associated maintenance, insurance, and taxes will allow your business to
operate at a certain maximum sales volume. If you want to grow, say double or
triple your current sales, you will need more of all the above items. When you
commit to that new larger building with more equipment and employees, you have
increased your "breakeven point" (the level of sales you need at
which you make your first dollar of profit).
Take this example. Assume that you are a local carpet store.
You occupy a 4,000 square foot building. You have a fairly fixed amount of
inventory, equipment, and employees. Let's say you are doing $1 million in
sales, your gross profit is $300,000, and your fixed costs (building, etc.) are
$250,000 with a net profit of $50,000. Since you have an established local
customer base, you are convinced that a shop three times this size would make
you even more money. Here is what to look out for.
Let's assume that your new 12,000 square foot building and
associated higher expenses have raised your fixed costs to $650,000. If you
double your sales to $2 million, your gross profit will be $600,000. That
leaves you $50,000 in the hole for the year. You would need sales of $2.3
million to get back to the same net profit you had before you tripled your
floor space.
Before you go down a permanent road of no return, play a few
games of "what if."
Last Updated by Tax on 2013-07-10 01:04:29 PM