UKC

This is the situation. A very, very close friend - I trust him explicitly - is wanting to set up a small business for which he is very highly qualified. He has very little in the way of capital himself but his bank have told him that they are prepared to give him a business loan but that he must put in an equal amount. Now I would very much like to help him but my money is invested through an IFA and I don't really want to touch it unless I really have to; if I did so I would loose the interest on it. I just wondered if my friends bank would accept me as a "guarantor" for them to lend him the FULL amount that he needs as this would be within my capability.

Any advice appreciated.

In reply to mypyrex:

Why can't you just ask the bank whether they would accept that deal? No point soliciting speculation on here, it's their answer that counts.

In reply to mypyrex:

Only thing I'd comment is the usual bumph about mixing business, money and friendship - it could potentially go tits up and see the loss of all three.

In reply to mypyrex:

Bloody banks, they are bailed out by us. Given money by the government and told to lend to small businesses and they ignore all that and put as many hoops in the way as possible.

In reply to mypyrex:
Would you be liable for the loaned ammount plus interest or for an unlimited ammount as a gaurantor for the whole business?

In reply to Dax H:


Without wanting to go off topic, irresponsible lending was a big factor in the financial crisis. Without knowing the ins and outs of the deal taking place you can hardly comment on them not wanting to lend money to someone without a certain amount of security. After all, it's generally the smaller businesses that are riskier...

In reply to elsewhere:


Don't know yet.

In reply to ThunderCat:


I know what you're saying but, in truth, he is actually more like a son than a mere friend.

In reply to mypyrex:

So you want to guarantee the loan but not lend him some money. What is his business plan and how soon is it likely the loan will be cleared? What is the worst case scenario for you if he defaults on the loan?

In reply to mypyrex:

I'm absolutely not a financial expert, but I'd definitely avoid doing what you're considering. It'll most likely end in tears, unless you're prepared to write off your money, in which case, go ahead. Good luck.

In reply to mypyrex:

My advice is this: investing in start-up businesses is highly risky, but with the potential for high reward. The amount of money you'd get as interest on a savings account is really trivial in comparison. So, if you really have faith in your friend and want to back him, then withdraw the money from wherever it is and give it to your friend in return for a suitable equity stake in the business. If you're not willing to do that, then you should stay away from any deal such as you've described. Afterall, the former is what you'd effectively be doing anyhow. So, no halfway houses -- decide.

In reply to Coel Hellier:

Thanks; that sounds fair enough. He currently works for a well established company into which he has ploughed some capital. He wants to leave them and set up but would not get his money back until next year. I am 100% confident of him repaying me.

In reply to mypyrex:

Sounds highly fraught to me. If your friend is so highly qualified and can therefore make money for someone I don't quite understand why he hasn't been able to raise 50% himself.

Also you put the word guarantor in speech marks. Forget it. Once you sign on the dotted line there's nothing qualified about it - if your friend's business fails (even assuming he's as good as you think he is, have you factored in every possible downside outside his control such as the Eurozone or China tanking?) - you will lose your money, end of. It will make the loss of interest that you are worrying about look like light relief.

FWIW I've started a number of businesses over the years and I've neither lent money or borrowed it.

In reply to Coel Hellier:
I've been in exactly this situation, my best friend set up a small business and needed £16,000 to buy new machinery to grow the business. He asked if I could help, which I could so offered him the money for a 50% share. He was a bit nonplussed by the 50% part and went to the bank instead, with no hard feelings. 10 years on his business is reasonably successful and provides him with an adequate income along with employing two staff. But here's the rub, at no stage would the business have been able to pay a dividend and will probably stay that way, so as an investment it looks to me like a dead loss.
If you want to help someone out, give them a loan that is repayable but at better (lower) intrest rate than the bank will offer, but don't ask for equity because small businesses tend to stay that way.

In reply to James Malloch:


You are correct but they still bug me.
2 years ago I bought a workshop instead of renting and despite the fact that we have been in the black since 1986 and the mortgage is less per month than I paid in rent they still wanted a 30% deposit and 3 directors to put our houses up as security (combined worth 4 times the price on the workshop) On Friday I get the keys to the workshop next door to mine and even though I have plenty of equity in the existing workshop and am getting the new one a good way below the market rate I have had to stump up another 30% deposit.
We have enough in the bank to buy it outright but it will flatten our cash flow so I won't do that.

In reply to mypyrex:

I think you are listening way too much to emotion here over reason. It is great you trust him so much, you guys clearly have a strong friendship. But you need to think rationally about the complications of this going wrong. It is great you trust him, by which I mean you trust him not to do you over. But that isn't the question. The question is how much you trust him not to be wrong. Everyone setting up a business is convinced it will work; unfortunately the reality is very different. You need to ponder what if the business goes tits up? No matter how unlikely you consider that to be (and of course you are basing that largely on what he says), what if it does go wrong? Do you want to be financially linked to it? Is your friendship worth testing to that extent? You have a big heart for wanting to help him.....but what if it does go wrong and you lose all the money you lend him? The possibility of this is very real.

Invest if you are willing to risk losing it all.

In reply to Rob Exile Ward:


Borrowing off friends is a very common method of raising capital for new ventures but my guess is that figures aren't available as these loans are often off the record.

I borrowed £15k off a mate to set up the Works, paid him back with total flexibility but with good interest but it didn't appear on my personal balance sheet so didn't affect any dealings with the bank. Nothing illegal as of course there was nothing formal about me and my mates arrangement.

Lemming, lend your mate the money and even charge interest if you want (remember to treat the interest as income so it is taxable) but remember if it goes pera shaped you will probably be last in line as a creditor and therefore you stand to lose it all. But to all intents you are giving it to him otherwise his bank will see it as not being his money.