Wednesday, January 25, 2012

5 Problems With Mixing Business and Friendship

Friendship, Göteborg, SwedenImage via WikipediaIn our lives we find so many ways to mess up with our money. With mistakes in judgment we are able to lose large amounts of money and with the money sometimes we can lose our friends. The way we lose both is when we go into financial relationships with friends or relatives. It may be a spur of the moment idea or a well thought out plan. Either way things can go wrong and they usually do. I have listed 5 ways they usually go very wrong.

Co-Signing for a loan.
The reasons for co-signing a loan for a friend or relative are many. It all starts when out of the blue you are asked to take part on a loan because the person can not be approved for the loan on their own. So you are asked to co-sign to help out the person. All kinds of promises are made about how it will be no problem for the friend to pay the loan back. They make plenty of money, but their credit is bad, so a little help is needed. You feel a little pressured because if you don't help your friend, they will not be able to get the loan.

For the friend, the deal is a no-brainer. It's all good because they will be able to get the loan and whatever they need to purchase. For the co-signer it may not be so good because they are on the hook for the full loan amount if the friend doesn't pay. If the friend doesn't pay, you can be sued for the loan balance and your credit will be effected greatly. Remember, the loan company did not give credit to the friend, because according to a credit report the friend does not have the ability to pay the loan back. Sure there are instances when all will go well and the loan will be paid back on time. But the loan may not be paid back sometimes, too.

What is your relationship to your friend worth? Will it end if the other party bails on the loan and you're stuck paying it back. No relationship can survive such a terrible blow. The best thing to do is say no to the loan. Your friend may be mad at you for a while, but the friendship will stay intact.

Renting to a Friend.
The scenario is you own a rental unit. The tenant is moving out. Your friend or relative needs a place to stay. Do you rent to them? Is it a good idea?

If you weren't renting to a friend and you just had a regular tenant you would make sure the potential tenant has a job, an ability to pay, you would have a proper lease and deposits. It would be all very business like. The tenant would know what's expected and the landlord would know what's expected. But what if you rent to a friend or relative? Would the same business like relationship occur. Renting is a business and has to be run like a business. The friend has to know they will be treated just like anyone else.

The problem with renting to friends is they sometimes think they can take a little advantage because of the friendship. They may be late on the rent or not pay a proper security deposit. They may not keep the place up as well as other tenants do. The possibility of misunderstanding is increased because of the blur of the friend/landlord line.

It is possible to have a good experience when you rent to a friend but the odds are, something will go wrong and you could suffer a falling out. Why take the risk?

Selling a used car to a friend.
This is an example of a disaster waiting to happen. You have a used car that you want to sell because you want to buy a new one. A friend or relative is need of a car. It's a perfect match. It's good for the seller because you are going to quickly sell the car. For the friend they have a car they know something about and may have already driven in the past. It's good for both parties, or is it?

Soon after the car is sold the transmission or brakes go out. What do you do now? If you sold it to a stranger you may get away with not paying for requested repairs. But with the friend, you are obligated out of friendship to make things right. If you don't the friendship could be destroyed.

What's the odds of a used car breaking down? I think the odds are pretty high something will break. Why take the chance of damaging a friendship. Sell the car to someone you don't know. If you do sell to a friend then be ready to make things right, just in case. The friendship is worth more than the cost of car repairs.

Going into business with a friend.
You and your best buddy have a incredible business idea. You decide to form a business. Good idea or bad? In a partnership, many expectations are formed by both parties. Also many questions need to be answered like who does what? Where does the money come from to operate? Who holds the check book?

This relationship is the hardest of all the examples listed. When things are going well in the business nobody complains. Difficulties arise when thing don't go so well. They may occur when one partner loses interest or thinks they are doing all the work. There are many ways for one or both partners to become disgruntled. This can ruin a business and destroy a friendship.

Sometimes partnerships work if all specifics are spelled out. But it can be almost impossible to keep each party happy. In this case everyone loses.

If you must be in business with a friend it's best to lay out all the details of the business and as much of the contingencies as possible. Having a 50/50 partnership doesn't have to be the way to proceed. It's better to make the stronger business person owner of the company and make the other person on a profit sharing plan or other agreed upon compensation plan. This way both parties are able to walk away from the company if they want. It's better this way because a friendship is worth more than any business.

Buying a vacation home together.
It usually starts with a couple of old friends going on vacation and discovering a great vacation home. Separately they can't afford the purchase but together they can. They purchase the home by either getting a mortgage together or using cash. Just like the business example, they are legally locked in together. It's like a marriage. And like a marriage it sometimes ends up in divorce. Suppose one of the friends doesn't use the home as much as the other or doesn't help in the maintenance or expense. These and many other reasons cause problems where one party wants out. It's difficult to divide the house in two and separate.

An alternative would be for one party to buy the house, if they can afford it. Then with the other party figure out some type of compensation for using the home. The stronger party with interest in the home should be the one to own the home. So when either party loses interest or the friendship breaks up no harm is done. The one that owns the house can sell and the other with no legal links to the home can just walk away.

With any joint venture all details must be worked out between the two parties. It's always better to make one partner the legal owner of the items in question and the other having a favorable compensation plan. Plan your business and plan to keep your relationships strong.


3 comments:

  1. Amazing post and very interesting stuff you got here! I definitely learned a lot from reading through some of your earlier posts as well and decided to drop a comment on this one!

    ReplyDelete
  2. That is true. As an author and business man, I can relate to how you said, "It is possible to have a good experience when you rent to a friend but the odds are, something will go wrong and you could suffer a falling out. Why take the risk?
    ". I hope more people discover your blog because you really know what you're talking about. Can't wait to read more from you!

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  3. So many friendships and family's have been destroyed over money. People have the tendency to throw you under the bus for a few dollars.

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