This may come as a shock to you but in my experience over many years and many similar situations, friends and  family frequently co-sign notes, lend cash, and lend credit cards, and while the best intent is always present, these loans frequently never get repaid, actualy it’s most that do not get repaid.

Unfortunately this creates many problems and just as frequently deteriorates the relationship. One wonders if the loan was worth the personal loss thus I propose the following 6 “loss mitigation” suggestions.

1. Resist the temptation to borrow from friends and family as the odds of failure are high and with failure the loans cannot be repaid. Even if failure is not the issue, just as often businesses are run at break even or below and any growth and development eats up any excesses, thus loans frequently do not get repaid under a wide variety of reasons all ending up with insufficient liquidity to include personal debt service to reduce notes owed to friends and family.

2. Document everything with a note and hopefully UCC’s for collateral or perhaps a subordinate second mortgage. This protects both parties, you and your lender, and  stands as a barrier to other creditors wanting to collect. Such paperwork and filing does protect the ones you want to protect on a priority basis, if things go bad and liquidation is the order. Make certain it is not a verbal agreement.

3. Assign a reasonable interest rate to the note as certainly the lender is giving up interest he could be earning on the money he has lent you. This is not profit but merely recovering his expenses and lost opportunity. Do not be afraid of loading the interest up a bit, why not, despite them being friends or family they are taking a risk and should earn from this exposure.

4. Please put in writing a clear explanation of the risk and the absolute possibility of the business going bust or the possibility of the business lasting but being unable to repay the loan. Have them sign off on this memo indicating the lender has a clear understanding of the situation.

5. Discuss and agree what will happen if the business does go bust. Decide now exactly how this will be dealt with, write a memorandum initialed by both sides so a clear understanding is memorialized and then live with the results.

6. Hopefully debt service will be forthcoming and all will work out. If not the understanding and agreement covers the possibility of default and the lender is adequately protected and understands the risk and potential for loss.

Do this and it is entirely possible you will preserve the relationship between friends and family willing to lend to you and your venture. 413-549-2966 call for help.