This is a guest post by Phillis – of Capital Edge Solutions
We’ve been away from the office for some time, and we are glad to be back!
The rest away from our phone, email, gadgets and the usual schedule has renewed our spirits and we are embarking on the remaining 3 months of the year (yes, December is not a month), with fresh energy. Prior to heading off for the retreat, we noticed that in practically every session we had with our Clients, there was a persistently recurring problem of bad lending – that is, money that had been lent to family or friends, that our Clients were still waiting to get repaid. (And, yes, we also are guilty of this – to some extent – so let’s take this journey of lending wisely, together.)
Here is a quick list of The 10 Kenyan Rules of Personal Lending, a list that can help you chart your way through the choppy waters of “friendly lending”. Feel free to top-up on this list and drop us an email on what may have worked for you.
You can also tweet us @PhyllisConsult #KenyanRulesofPersonalLending
Never borrow to give
Why do people borrow to give? In no text or scripture is there buried wisdom that states: “Give what you do not have.” Often times, one side (the falsely generous lender) ends up repaying interest on a loan that their friend has refused to pay back – never mind the fact that their friend has upgraded to a more expensive residence. It’s a clear WIN-LOSE scenario from the start.
Let’s end this – whether we do it from guilt or hope.
Let’s end this now.
Know your borrower
Are you fine with your friend’s character? Do you trust them? Are they capable of paying you back?
If your cousin, who has been job-hunting for 3 years, asks you to partner with them on a deal that will help you both retire young, and retire rich – it may be time to think twice, and then hang up the phone.
Never lend to impress
This one is quite common among men – they would rather lend to impress, than not lend at all. “They need to know that I am a man of means!” is the thinking behind this behaviour.
When it comes to finances, check your ego at the door.
Leave it outside, in the freezing cold.
Ego has no place, in lending.
Clearly communicate your expectations
What do you expect? Repayment, for starters.
Will you charge interest? If yes, how much? How soon do you want the money back, or will your loan be open-ended? What is the money for? Have this conversation, right at the start.
Any loan that lacks a fixed repayment date will be treated as a grant. In fact, your borrower will take on the attitude: “There’s more where that came from, so I don’t need to pay it back.”
Food for thought.
Document your expectations and maintain a paper trail
It’s mind-blowing that every time we raise this issue at our workshops, our Clients balk at this reality. They complain:
“Surely, Phyllis, am I to make my sister sign that I have lent her money?”
This is how we respond: “When your husband walked you down the aisle, you exchanged vows – your commitments to and expectations of one another – right?”
Then follows the killer question: “So if you and your husband put pen to paper in front of witnesses, why can’t you and your friendly borrower do the same?”
Document what you expect, with clear timelines.
And get a witness to sign, too.
Then write out a Banker’s Cheque to your friendly borrower. Mobile transfers, in personal lending, eventually lose their footprints in your wallet and mind – so go back to lending using a Cheque, for ease of tracking.
Request security or guarantors
Security is simply assurance your friend provides you and they should be comfortable doing so, after all, they are going to repay you – right? If you do not know where to start, your lawyer could help you draft a template agreement that you can quickly use going forward.
Lend what you can afford to do without
It would be sad if your borrower disappeared on you, and you lost your ability to pay your rent, pay your child’s school fees, or fuel your car.
Ask for your money back
We have a number of Clients whose home deposits are sitting in their friends’ hands. It is surprising to see that the soft loan here, and the mobile transfer there, quickly do add up and voila! before you know it, a large sum of cash is in your borrower’s hands.
Ask for your money back – verbally, and in writing.
Become a good steward of your money
Think about it: You worked in order to earn your money.
Why is it that when someone simply asks, cash then proceeds to flow out of your pocket?
Do you require effort on their part to, say, come up with 50% of what they need, then you can match? And we are not talking about giving to the poor here because there is a place for giving in our lives.
Rather, what talents, skills, abilities or knowledge has your friend applied to alleviate their situation? Or is your cash needed to maintain your friend’s or relative’s lifestyle?
What lessons are you teaching – production or consumption?
Print and use this list
Too often, the person lending may feel they must explain to their friendly borrower why they need to sign an agreement, have it witnessed and take security before they can give out the loan.
Think about this: A Bank does not feel guilty asking you to sign all that paperwork because they know they are lending responsibly and they have a duty to protect their shareholders’ funds.
If you do not use this list, you must ask yourself these two questions.
a. Do you want to lend responsibly?
b. Do you have a duty to yourself to use wisely what you have been blessed with?
Or do you want to take the wide road of ease and lend without expectations and:
a. Enable irresponsible financial behaviour, on the borrower’s part.
b. Treat your money as a grant – basically saying, “You don’t have to pay me back. Just do whatever and pay me whenever. There’s more where that came from.”
How to put this list to good use
Print this list every time you receive a borrowing request from a friend, and go through the list with them – over tea, coffee or your preferred beverage – face-to-face. It’s not the Spanish Inquisition. Have a clarity-seeking conversation, and enjoy getting to know each other better, too!
Now that you know what you know, will you lend?
In the final analysis, the choice remains yours.
This article was written by Phyllis Consultant @ Capital Edge Solutions, Copyright 2013. Posted to www.thecapitaledge.blogspot.com on 4th September 2013. Reproduction and distribution of this article are approved so long as the author has been credited and this paragraph has not been deleted from the article. Let information flow freely through the masses as we move towards housing this generation. You have the power to make a difference.