Magazine article Business Credit

Lending and Collecting from Loved-Ones

Magazine article Business Credit

Lending and Collecting from Loved-Ones

Article excerpt

Some types of people are more difficult to collect money from than others. Such debtors include bankrupts, uncontactables, don't cares, and those whom we love. And of all of these, perhaps the most difficult to collect from, are our loved-ones. In fact, maybe one such debtor is sitting right next to you as you read this?

Here are some quick tips when collecting from loved-ones. Loved-ones are defined here as family (including in-laws) and friends.

Tip 1: Don't lend money to a loved-one, only give gifts! For many of us, it's not worth destroying a relationship over money. Chasing loved ones for money can push them further away from you. Debts can split families. Instead, give the money as a gift and in return get more sleep. If you must, tell your loved-one it's a loan, but in the back of your mind treat it as a gift. If it's to an in-law, consider it a dowry. If the person pays it back, great. If not, fine.

One way to minimize your risk while maintaining the relationship is to give them less than what they want.

Now, if for whatever reason you don't want to follow Tip #1, please read on. In this case, you have become a "Loved-one Lender" or "LOL" for short. It's time to get serious about the loan because, for reasons known only to you, you're actually expecting to get your money back.

LOL Tip 2: Document the loan transaction. Your loved-one might think it silly, but tell him/her that you need it for your records. Lending money is serious business. It should be documented. If possible, have the loved-one fill in the repayment schedule detailing the payment amounts and dates. This will add to greater commitment. Then have him/her sign it.

LOL Tip 3: Give special incentives for early payment. Give basic incentives for on-time payment. Have disincentives for late payment. Ideally these are spelled out in the loan document.

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LOL Tip 4: Use a third party to collect the account. The loan documentation should state who will handle the loan in the event there is late payment or worse, a default. Third parties help get you out of the collection process. In essence, you become the "good cop." Third parties can be a professional debt collection agency or someone that you both trust.

LOL Tip 5: Have the loved-one sign the document in public and hand over the money in public. Don't pass the money with just you and him/her present. Borrowing money creates a commitment, and public commitments are more difficult to break than private ones. Announcing to yourself that you will quit smoking is easier to break than announcing to all your work colleagues that you will quit smoking. Why are most marriages huge, public affairs? It's to cement the couple and their families together. Compare this to Las Vegas quickie marriages with just a minister and an Elvis impersonator acting as the witness. There is little cement, probably more like glue, holding many of those marriages together. (Author's note: my brother had an Elvis impersonator as a marriage witness and his union is very strong.)

LOL Tip 6: Ensure your loved-one has a piece of the action. If you are lending money so that he/she can buy a car, then ensure he/she has money invested in the asset. You shouldn't bear the whole risk. The same goes for college loans. …

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