If you go ahead, put all in writing.It's never easy to say no to a customer. But lending a financial hand can leave you out of money and out of sorts with your customers.
According to One 2 One Lending, a company that helps formalize loans between individuals, about 14% of private loans end up in default, compared with just 1% or so for bank loans. To protect you financially, make sure you don't fall for the top four costliest mistakes individuals make when lending money to customers:
• Not being suspicious enough. When someone comes to you for a loan, your first thought should be: Why? That is, why do they need the money, and why are they asking you for help?
You also need to wonder hard why they haven't been able to get a loan from a more conventional source. Point is: There are plenty of folks in the business of lending money. If your customer can't get money from someone in the lending business, that’s worth two or three red lights going off in your head.
• Lending what you can't afford to lose. Never lend money that you truly need. The best litmus test before you say yes is to ask yourself if you would be comfortable giving the money away.
• Skipping the formalities. Handshakes are not good enough for sealing a loan agreement. Put everything in writing. In fact, it's a good way to size up the credibility of the person who needs your money: They should tell you right off the bat that they want to sign a formal loan document with you that spells out the terms of the deal. Once you have it filled out, all parties should sign it in front of a notary; it's just a nice bit of formality to have in your pocket in the event anything goes wrong. In the document you want to spell out the specifics: What interest rate you will receive, when the payments are due, how much is due with each payment and what penalty will be paid for a late payment.
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