Bank of Me

I must apologize as I have been "MIA" for the past several months. Many of you know that Jacky has joined me in Tampa and we are extremely happy to be living together after living apart for the past two years. With her arrival in Florida we had to move into a bigger place, get our place in New York renovated and rented out, purchase a car, and I still have not taken a day off from work. With all that I am very excited for the planned mini vacation we have next week.

Now, back to business.

In the current economic crisis people are turning to alternative sources of cash. If you are wondering where people are going, take a look in the mirror, because it is you!

Whether you are asking for a loan or being asked to make a loan the situation is just awkward. For this reason I would suggest always asking in private. It allows everyone involved an opportunity to assess the situation as well as ask and answer difficult questions.

Making a loan to a friend or family member can be very stressful. I have been on both sides of the table and the easiest way of severing any relationship is by being financially irresponsible. Most times the pressure of acting financially responsible is the burden of the person receiving the money. I feel the borrower and the lender has a level of responsibility so that the relationship can remain intact.

As I stated above, I have been on both sides of the table. In my personal life I have made loans as small as a few dollars and some in the thousands. In my profession I have made loans as small as $100K and as large $250 Million. I have seen the good, the bad, and ugly with respect to lending money. Below I have outlined some "Do's" and "Dont's" for those asking and those being asked.

For the person asking for a loan:

Always ask your friend or relative in private. Asking in private will allow tough questions to be asked and answered.

Drop your Pants!!!! If you are asking for money be prepared to give full disclosure. Tell the person why the money is needed. No one likes making a loan under false pretenses. Not being honest can lead to the beginning of the end of a relationship.

The biggest concern for most loans between friends and family is when will repayment occur. Always be very specific and realistic. Don't just say "I'm gonna hit you back soon!" When people have told me that it usually was the first sign that I will never see my hard earned money again. If your expectation is that you will be able to repay the loan in full on June 17th, say June 17th. Having an agreed upon date will ease the pressure of when repayment will occur. If circumstances change and you are not able to meet the deadline be proactive and let the person you owe know what has happened and when you feel you will be able to make good on your obligation.

Always give the lender adequate time to make a decision. If you rush or pester the person the chances of a "No" go up dramatically.

If you are Making the Loan:

In making a loan the Lender has an obligation to act responsible. In my profession as a Commercial Lender all of my loans are properly documented, the borrower has strict financial covenants that they have to abide by, and typically I have the right to assets that have been posted as collateral. It is my responsibility to do the proper due diligence and assess the Bank's ability to take on additional risk. Personal loans are very different. Usually the borrower has no assets worth taking as collateral, there typically are no financial covenants that can be enforced to ensure repayment, and the mere fact that they are asking for a loan from a friend or family member suggests that the loan is risky. Because we are a litigious society we do have documents that can be used for personal loans. The thing to remember is if the loan goes bad is it worth the time and emotional drain to take the person to court and even doing so will not ensure full repayment.

Part of being a responsible lender is assessing your risks. Assessing your risks includes knowing your borrower. If Cousin Craig comes asking for a loan and you know he does not have steady job or he is simply borrowing from you to pay someone else it is not a good idea to make a loan to Cousin Craig.

Sometimes being responsible has nothing to do with the borrower. The person may have a good job, is responsible, and an overall good credit risk. However, if you as the Lender do not have the capacity to absorb a potential loss (all loans have a potential loss) you should not make the loan. As a lender your conduct can sever the relationship. I've seen people hound those they have made loans to, physically and verbally threaten, and even sudden changes in attitude can impair a good friendship. In my own profession I am seeing good borrowers having their lines of credit cut, interest rates and fees raised, and loans not renewed primarily because the bank does not have the capital base to take on certain levels of risk.

At the end of the day relationships are important. If simply by making a loan you feel the relationship will fall apart, don't make the loan. If someone is asking for a loan of $700.00 it may be better to offer to give $100.00 with no "strings" then to loan the $700.00 and lose a friend or family member over it.

In today's society we are seeing why both parties have to be responsible when engaging in any financial arrangement. The global implications have been and continue to be damaging. When a personal loan goes bad the relationship between the two individuals is not the only one that suffers, the friends and family of those involved are also affected.

At the core, making loans professionally or personally is a good thing. However, responsibility is key. If you cannot pay a loan, do not borrow. If you do not have the capital base to make the loan, do not lend. Being responsible upfront can save a lot of grief down the road.

As Always, Stack your Chips!!!!!