No definately not!!! Unless you can afford to lose £5000 and probably your friendship. Drawing up a contract will mean nothing if your friend simply does not have the money to pay you back.
I find it a little strange that your friends son cannot get a £5000 loan on his own, it isn't really a huge sum of money. I wonder what business plan he presented to his bank? There must be a reason they turned him down
Maybe he also has debt problems and/or a poor credit rating.
No, lending money to a friend can be the easiest way to lose a friendship. Besides Im a Yorkshireman and too tight anyway.
Old Faithful we roam the range together,
Old Faithful in any kind of weather,
When the round up days are over,
And the Boulevard’s white with clover,
For you old faithful pal of mine.
They will take him with a guarantor because it means they shift the risk from them to you.
If the bank, who lets face it has access to far more information about his financial situation than you do, wont loan him the money then you shouldnt either.
As has been said, if you can't afford to give him the money and write it off, then dont do it.
As for what you say to your friend..."I am sorry but I am not in a position to be able to do this" "But...." " As I said, I cant do this" repeat to fade. It is better that it costs you a friendship than your hard earned money. 5k isnt much when it comes to staring a business anway, he could work for a couple of years and save it. If his business is such a sure fire hit then he will do that.
Hang on - I wouldn't rush to say no, though I would be cautious.
First, banks are not in the venture capital business, so they are very reluctant to lend on start ups. That's why they want a guarantor.
Secondly - you say you don't have confidence in the business idea. Well, here's where you can contribute. If the son is on JSA (or ESA) or can get on it, then he can qualify for the New Enterprise Allowance through which he can get a £2500 startup loan without a guarantor or security. There are ways to get more loans or even a grant too.
Google 'new enterprise allowance' (sorry, new poster - I can't post links)
To do this he will be assigned a business mentor who will work with him to create a solid business plan.
If he hasn't got a detailed business plan already then he shouldn't be starting a business.
If the son is not on JSA or can not get on it, then there are other sources for loans and grants for start ups, all of which need business plans. Google these or, even better, start here:
Google 'government business support helpline
Google 'government business finance support finder'
I volunteer as a business mentor for the NEA. Helping your friend's son this way is far more valuable than just guaranteeing the money. You never know, he might have a rock solid business plan and be the new google - in which case you can start discussing equity participation :-))
It's been said many times for very good reason - "Don't mix business with friendship". If you're unsure, don't do it.
Or, if you can afford the risk, suggest you put the money up and take a percentage of the business with a fully drawn up contract between you and your friend's son. That way, your loan is on a sound business footing. If the business is a success it's up to you whether you take the percentage or whether you simply ask for the original £5K back.
However I wouldn't just say 'no'. Do what the banks did - read his business plan, find out if he has any proper means of making a living and earning a profit, see if he really needs the £5000 and what he'll spend it on, etc.
Then at least you can say no with confidence.
Also, if you REALLY want to help this friend out, then you can weigh up if theres any assets in the business should it go belly up. For instance - he borrows £5k and spends it all on a van. Things don't go well and he can't make a living off the profits, but you might then be able to sell the van for £3k, leaving your mate to stump up the rest of the money which is a lot more manageable.
Replies
I find it a little strange that your friends son cannot get a £5000 loan on his own, it isn't really a huge sum of money. I wonder what business plan he presented to his bank? There must be a reason they turned him down
Maybe he also has debt problems and/or a poor credit rating.
Old Faithful in any kind of weather,
When the round up days are over,
And the Boulevard’s white with clover,
For you old faithful pal of mine.
£5,000 isn't such a massive start up amount, but the bank turned him down for a reason, and so must you ... do NOT act as a guarantor!!
As a true friend, you should sit down with them both and discuss the business plan. You may be able to offer advice, or help in some other way.
They will take him with a guarantor because it means they shift the risk from them to you.
If the bank, who lets face it has access to far more information about his financial situation than you do, wont loan him the money then you shouldnt either.
As has been said, if you can't afford to give him the money and write it off, then dont do it.
As for what you say to your friend..."I am sorry but I am not in a position to be able to do this" "But...." " As I said, I cant do this" repeat to fade. It is better that it costs you a friendship than your hard earned money. 5k isnt much when it comes to staring a business anway, he could work for a couple of years and save it. If his business is such a sure fire hit then he will do that.
First, banks are not in the venture capital business, so they are very reluctant to lend on start ups. That's why they want a guarantor.
Secondly - you say you don't have confidence in the business idea. Well, here's where you can contribute. If the son is on JSA (or ESA) or can get on it, then he can qualify for the New Enterprise Allowance through which he can get a £2500 startup loan without a guarantor or security. There are ways to get more loans or even a grant too.
Google 'new enterprise allowance' (sorry, new poster - I can't post links)
To do this he will be assigned a business mentor who will work with him to create a solid business plan.
If he hasn't got a detailed business plan already then he shouldn't be starting a business.
If the son is not on JSA or can not get on it, then there are other sources for loans and grants for start ups, all of which need business plans. Google these or, even better, start here:
Google 'government business support helpline
Google 'government business finance support finder'
I volunteer as a business mentor for the NEA. Helping your friend's son this way is far more valuable than just guaranteeing the money. You never know, he might have a rock solid business plan and be the new google - in which case you can start discussing equity participation :-))
Or, if you can afford the risk, suggest you put the money up and take a percentage of the business with a fully drawn up contract between you and your friend's son. That way, your loan is on a sound business footing. If the business is a success it's up to you whether you take the percentage or whether you simply ask for the original £5K back.
However I wouldn't just say 'no'. Do what the banks did - read his business plan, find out if he has any proper means of making a living and earning a profit, see if he really needs the £5000 and what he'll spend it on, etc.
Then at least you can say no with confidence.
Also, if you REALLY want to help this friend out, then you can weigh up if theres any assets in the business should it go belly up. For instance - he borrows £5k and spends it all on a van. Things don't go well and he can't make a living off the profits, but you might then be able to sell the van for £3k, leaving your mate to stump up the rest of the money which is a lot more manageable.
Still a 'no' on all accounts though.