I’m about to lend some money to a friend. Should I get a lawyer to do the paperwork?
The friend is starting a new business, and I want to help. But I’m nervous.
Gloria
Lending money to a friend in need always seems like a good enough idea. Then they miss a payment or two. And then things can get very awkward.
Having something in writing before you wire the funds is essential. You’ll want a written contract to address several things, like:
Payment terms. Will your loan come back to you in a lump sum, or in installments? What’s the deadline for repayment?
Interest rate. How much interest is payable and when does it get compounded?
Ability to convert your loan. Are you lending money to a business? If so, you might want the option to convert your loan into shares of that business, and at a specified price.
Collateral or security. Could you take something into your possession if the loan isn’t paid on time? And how long would they have to repay before you can sell this item? Often collateral is taken on property like a home or car.
Much may hinge on the amount of the loan. If it’s a big number (what’s considered “big” is subjective; it depends on your context), spending money on a lawyer would be a prudent investment. Also, if conversion or collateral (the last two points on the above list) interest you, a lawyer is better placed to prepare the right language for this.
Keep in mind the loan agreement is just one document that might surface. Your friend may also ask you to sign a bank guarantee or other documents to help them with their financing. That’s a red flag — don’t sign anything unless you understand the potential consequences.
Check out our guidance on lending money for more information. We’ve even got a template loan agreement to help get you started.
