Investing in friends
Hello fellow monkeys. This is my first entry here, hopefully some of you find it thought provoking and/or entertaining, even if it's just poking fun at my grammar.
Growing up my dad thought me that I should never let friends or families barrow money. In order to keep a healthy personal relationship you should count any money you give them as a loss.
Well, this weekend my girlfriend was bitching at me about how she had let a friend barrow some money and was yet to be paid back. In her rant/fit she brought up a friend of mine that I had given a couple grand about 3 years ago. What she didn't know is that I had invested it in him so he could start up his own business. Thanks to it doing well I have already gotten my money back 5 fold, and should keep on making a nice amount from it with minimal work.
After setting her straight, It got me thinking of the difference of investing in a loved one versus letting them barrow. Would of I felt the same resentment of him not making something on my investment as if I had not been paid back? Does he now feel some resentment towards me for making money off him? Should investing in friends and family also be off limit?
I took me some time thinking to myself, talking with my girlfriend and the friend I had invested in to come up with an answer. I came to the conclusion that I would of felt no resentment had he failed, even though the amount I had invested in was above what I was willing to count as a loss, and if I was to do this again in the future I would have to consider it further and have a serious one-to-one talk with the person about our relationship and the possible outcomes. Luckily for me this friend felt no resentment for me making money off him, because he knew what it entailed when he accepted my investment.
How about you monkeys. How do you feel about letting loved ones barrow from you? Would you invest in them? Or are both these situations just bombs waiting to blow up in your face?
I lend money to friends strictly as business loans carrying business interest rates. I also have strict limits on how much I will lend. Basically, if I know you and trust you not to be a flake I will lend money to you at a moderately better interest rate than Prosper probably would, and there are no hard feeling if you make every reasonable attempt to pay back the loan but default from inability to pay.
You have to (1) charge interest, (2) lend in a small enough size not to get emotional in the event of a total loss, and (3) remember that if he can't pay his debts, he is probably having a much worse day than you.
NEVER, EVER, EVER CO-SIGN A LOAN. ESPECIALLY A STUDENT LOAN. If someone asks you to co-sign a loan, offer to lend to them directly instead, again with strict loan limits. This policy has saved me tens of thousands of dollars. If a lender will not lend under any circumstances without a cosignature, it means they figure there's a good chance YOU'LL be paying the loan. And lenders are pretty darned good at estimating this kind of stuff.
I always let close friends borrow money when they ask. It's a non-issue. If I am in a position to lend someone I trust money, my check book is out. I've also never not been paid back, and have lent out $1,000 or more a half-dozen times by this point.
I know they'd do the same for me if I were in need.
I've lent out $1000 or more a half dozen times too but I was also asked to cosign a $15K student loan two years back.
I said no. I offered to lend $2K instead at CPI + 8%. He took it and had his aunt cosign for a $13K loan.
The loan went bad. The student, in a professional grad school program, graduated and couldn't find a job.
THANK GOD I didn't cosign that loan.
THANK GOD I walked away with only a $2K loss.
THANK GOD this means he and his aunt have to pay back $2K less to Sallie Mae, regardless of bankruptcy.
When a loan goes bad on you, Vontropnats, you will change your rules for lending. I never lend more than I can afford to lose without feeling upset about. And I always charge an interest rate that makes the borrower and me feel like there are no hard feelings in the event of an honest-to-god "I can't afford to pay you back" situation. Sometimes that happens, and you don't want to feel gypped- or for your friend to feel absolutely mortified- when it does.
NEVER EVER EVER COSIGN A LOAN. ESPECIALLY A STUDENT LOAN. Offer a direct loan instead, and only for money that you won't get emotional about if you lose.
As if you're not an actual institution a loan is not debt... alas it's not an asset... therefore doing so is not an investment unless you're swapping it for equity -- which is what you did and so therefore you're right.
All these other stories are about getting debt for nothing but a little return. Honestly, it just sounds like Illini and so forth enjoy whinging about their loans gone bad or trying to extort money out of people.
If you're friend has an emergency and you can afford it, give him some extra cash. Give it to him. If he's a long-term thing then he or she should figure it out on his own.
This is the first time I've mentioned it in two years. It's simply to let folks know that it's better to lend directly than to cosign a loan.
charging your friend interest on a 2k loan... not very christian of you lol.
seriously though, I don't know what kind of friend puts another on the spot for a 15k loan; as well as one who asks for a return on 2k - what is that $160? lmao, if that's what made you feel comfortable about the loan then you've got some damages bro...
For loans under $500, I don't worry quite as much, but in the $1000-3000 range, where I can I make an investment and not lose too much sleep if it disappears but friends will lose a lot of sleep on (if they're real friends), the interest is charged so they won't lose sleep, and it's largely just based off what I can earn in the bank plus my rough estimate on the default risk. (I don't charge a market risk premium).
The friendship is more important than the loan. As the lender, you need to be aware of that and engineer a system so that (A) you don't feel like a chump if the borrower can't repay and (B) the borrower feels he can still be friends with you if he runs into financial difficulty. I've found that treating it as a business transaction and charging interest, even if it's only $50, is really the only solution. If you can come up with something better, let me know.
The interest isn't a money thing. It's a tool for defending the friendship. Same with the loan limits. I would lend $20K interest free if I knew I wouldn't feel like an idiot and lose a friend if the loan went bad.
Suze Orman lol.
I know that OP was talking specifically about INVESTING in friends (e.g. a start-up,) but I'll continue anyway...
IP, when you say you treat it as a business loan, does that mean that if your friend defaults, he is not liable to pay you back from that point on? If I'm lending to a friend (or, more likely borrowing from one,) the implication is that the loan can be repaid whenever - a year, two, it doesn't matter (unless stipulated,) because as you said, it's basically counted as a loss. If the guy seems like he will never be able to repay you, the interest is meaningless. And if you see that he is in fact able to do so, but doesn't, then you got off cheap. Also, if it is the case that they are free from repaying after default, as they most likely would be if it were a real business loan, then you're creating the moral hazard here.
The fact of the matter is, no amount of interest, or w/e, is going to keep it from being personal - that's why they're your friends... At the end of the day, it's gonna leave a bad taste in someone's mouth.
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