Loans by Family, Friends and Fools; a good idea?

With today's negative savings rates, we are seeing it more and more often: mutual loans between an investor and a corporate borrower. Arrangements are made within the family, close friends lending each other money or "I know someone else who has money and would probably like to make some returns."

A good idea or is there more to it?

Constructions like this are fine in themselves. However, without experience in originating and managing loans, things can go wrong too often. Consequence: write-downs on loans issued resulting in negative final returns. So, as an investor, you will not get your deposited money back in full. In the process, there is a chance that mutual relationships will be strained or even irreparably damaged.

Make good arrangements

How can it be done? Including the thirteen points below will benefit the negotiation and the relationship:

Analyze first and then decide
Analyze on sound financial information
Analysis including market and business analysis
Reduce risk by using present collateral
Consider the position of other funders
Making the price of the loan appropriate to the risk
Not doing the decision making alone
Spread: rather 10 small loans than 2 large ones
Firmly establish legal documentation and signature
Collection of interest and principal
Requesting information periodically during the term
Proactive monitoring and intervention for payment problems

Acting thoughtfully

Are there many things to watch out for? Yes correct! Does that make it no longer interesting? No you don’t! Lending to third parties is and always has been an excellent asset class with stable returns that is insensitive to fluctuations in the stock, bond or real estate market. But don’t become a “Fool”! Stay cozy Family and Friends! Want to know more? See how WDL Credit Funds can help here.