The money pit: Should you lend to friends?
TEXT OF INTERVIEW
KAI RYSSDAL: There are a lot of names for it: moolah, cash, dough. Whatever you call it, doesn't change one simple truth: Money can't bring you happiness. And sometimes it can bring you pain. Case in point, an e-mail we got not too long ago from a listener. His friend asked him for a loan. Let's just say afterward, the friendship dropped like a bad stock. Ira Bryck is the director of the University of Massachusetts Family Business Center. Mr. Brick can it ever end well, money between friends?
IRA BRYCK: Well, usually it does. There's a 14 percent rate of default which is never a happy ending but in many cases it can have some advantages if you have the right honest discussion.
KAI RYSSDAL: Well, let's lay out a couple of hypotheticals here. My brother comes to me and he says 'listen I need $15,000 to start up this business idea I've had, it's been just killing me for years I haven't been able to do it, can you help me out?' What do I do?
IRA BRYCK: Well first of all if you were a banker you would be considering that person's character and their collateral and I think that as the lender you have every right to consider those same things. And so right away, you do have the right to say no and there's a certain science to saying no. But assuming that you said yes I think you would also have the right to hear more about that person's strategy. A lot of entrepreneurs are very short on putting it down on paper and that's something that a bank would certainly want to see.
KAI RYSSDAL: I mean in all honesty if this is a close friend of mine or a relative, I'm going to eat the $15,000 and chalk it up to experience.
IRA BRYCK: Well that's something that you should consider beforehand. First of all, there's a good chance that you're not going to get it back. Be ready that that loan could turn into some sort of gift or debt that you'll be writing off before too long.
KAI RYSSDAL: Let's get back to that science of saying no thing. How do you do that?
IRA BRYCK: There's always the option -- this wouldn't happen between friends as much as maybe between a parent and a child -- where if you said, ' I respect your willingness to take a risk with that money that I'd lend you, but I'm not as risk-tolerant as you and I would feel much safer paying towards my grandchildren's education.' So you could dedicate the money that they would not then have to spend.
Blame it on somebody else. Say 'I'm protecting myself from the IRS and I need this loan documented' or 'My accountant would never let me make a loan without the proper paperwork.'
You could also say, you know, 'If you pass all the requirements that a bank would have you run through, don't take it personally, I'm just not a great banker.'
KAI RYSSDAL: Should you consult an attorney and get some formal contract thing signed up or is this one of those do-it-yourself kinds of gizmos?
IRA BRYCK: Certainly. I mean there are forms that you could buy in any stationary store that would help you document this, but if the loan is not paid back and you want to write off a bad debt, the IRS is gonna want to see that you have properly documented this loan and that there's the right rate of interest for it to even be considered a right loan. So certainly it's worth the small investment of an attorney to make sure that it all goes right.
There are also companies out there that will just officiate a little bit and make sure that you are serviced in your loan in the proper way. Circle Lending, they're in Cambridge, Mass., and you can read all about how to think about the loan as a lender or a borrower and they will do everything that a bank will do including be the middle man there. But certainly they would help you get it all down on paper with the ts and the is properly crossed and dotted.
KAI RYSSDAL: Let's say a close friend of mine comes to me and says 'Listen I need $7,000 can you help me out?' I mean am I allowed to say 'Well wait a minute, what do you need it for?'
IRA BRYCK: Well yes I think that you could say it in a way that is loving and friendly, and you could explain that you have some reservations. First of all, that you can't live easily without the $7,000 and that you've heard all sorts of stories about loans being defaulted on and you value your friendship so much that you don't want your friendship to end over $7,000.
KAI RYSSDAL: I suppose there are qualitative differences as well depending on what the money might be used for. It's one thing to give somebody $10,000 or $15,000 that they can then put into a business that they have a really solid plan and other investors and it's another to give somebody some money to pay off a recurring credit card debt.
IRA BRYCK: Right and you might make a mercy loan for that person who has just hit a rough patch and they can explain to you why they're going to get out from under and pay you back.
If you really feel that that $7,000 is going to go to drink or interest and they're borrowing from three other people next month, then you should just consider that this is the cost of your friendship to loan the $7,000 or lose the friend etc. So sometimes it's a business decision but sometimes it really is a judgment call
KAI RYSSDAL: Ira Bryck is the director of the University of Massachusetts Family Business Center. Mr. Bryck thanks very much for your time.
IRA BRYCK: My pleasure.