You’ve been doing a lot of changes to improve your financial health. You’re proud of your accomplishments and your friends could tell that you’re doing well. Then one day, a friend confides that he’s been having money problems and hopes that you could help him by lending him some cash. What do you do? Do you immediately dig into your pocket and help your friend? Or do you simply keep quiet and pretend you didn’t hear anything and change the topic of the conversation?

It takes a special bond among friends before they could comfortably talk and be open about each other’s financial problems. If you find yourself in this situation with someone you barely know (which I’ve seen happen), then the best advise is to simply say, “I’m sorry, but as a rule, I don’t lend money to friends.” This statement is straightforward and gives your message without attacking the character of the person.

But how about those friends you’ve known for years? Do you treat them the same way or do you give in to their request for the sake of friendship? You say to yourself, “Friendship is more important than money; it takes time to gain friends but money, you can easily earn with your income.” I believe that this is true, but I also believe that in most cases, allowing them to borrow your money is not the best way to help your friend. So how do you know when it’s best to lend out your cash? And how will it affect your personal finances?

When a friend wants to borrow money from you, ask where it’s gonna be used. Be serious with the question but genuinely show concern over his financial troubles. You want to get the most honest possible answer. After he relates his situation, it’s best to say that you would have to consult your budget if you can afford to lend him the amount he needs. Wait it out for at least two or three days. This will give your friend time to look for other ways to get the money while you try to learn more about his situation from other friends and his family.

Your first judgment call is to decide if your friend deserves the loan. The harsh truth is that sometimes, the money is simply being used to fuel an addiction. This does not necessarily mean illegal drugs but more often a frivolous obsession like keeping up with fads or maintaining a hobby that’s too expensive for him. If you find your friend complaining about his financial woes while he’s drinking a Starbucks frapuccino, then there’s definitely something wrong there.

Special situations involve medical emergencies and business proposals. With the first case, I know that it’s really hard to refuse when the life of a person is involved, but immediately giving in to the request is like buying on impulse. There could have been a cheaper alternative or the situation was not really serious in the first place. So it pays to take stock of the situation and know you and your friend’s options first.

When a friend is asking money from you to start or expand a business, then you would have to clarify if he’s asking you for a loan or he’s inviting you to be an investor. The first one, you’re expected to be paid back but the second one, you’ll be sharing in the company’s profits instead. This situation calls for more extensive evaluation specially if you’re being asked to be an investor. In general, the fastest way to give a judgment call whether your friend deserves the loan or not is to examine his entrepreneurial skills. Does he have what it takes to make this business successful? Did he do extensive studies and carefully planned out this venture? If the answers are yes, then I think that it’s worth giving your friend more attention and consider a business partnership.

If your friend has valid and acceptable reasons for borrowing money, then your next judgment call is to determine if you can afford it or not. If you don’t have a working budget for your expenses. Then I suggest that you make one before you lend out your money. By having a clear picture of your own financial situation, you do not risk having money problems of your own in the end. It’s best to take out this expense from your entertainment budget. Be sure on the amount you could afford to give, this is more important than how much your friend really needs. In the end, no matter the amount you gave, a true friend will deeply appreciate the sacrifice.

Before you say YES
Are you ready to give the money to your friend? I suggest that you ask yourself first some questions. First, can you picture what would happen if your friend doesn’t pay you back? How will that affect and change the relationship? Could you live with the possible consequences? If he comes back to you to borrow more money which you could no longer afford to give, are you prepared to say “no” this time?

Congratulations, you just prepared yourself for the worst case scenario. If you cannot find resolve with the previous questions, then I suggest that you reconsider your decision and perhaps try to help your friend through another way. It may also help to be honest and open with your friend and ask how exactly is he planning to pay you back. Where will he get the money? Will he be paying through installment or as lump sum? What will be the payment schedule?

When the amount is considerably big, it’s best to get everything in writing. A lot of people get “amnesia” whenever they borrow money. It’s not rude to ask for a collateral or ask them to issue post-dated checks. Specially if this is a business transaction, it is necessary to get all legal documents ready to avoid future conflicts in the partnership. In the end, when everything goes well, you can use that contract as a testament to your genuine friendship.

If you have to say NO
I think that it would be far worse to hound your friend for the money than it would be to say NO from the start. Make your friend understand your situation and explain to him your own financial goals. If you think that your friend’s reasons for the loan is capricious and unfounded, then try to help him understand this. Be calm, diplomatic and most importantly, offer to help in another way such as teaching him how to properly track his expenses so he won’t run out of money regularly. Both of you could also explore possible income opportunities to augment your earnings.

It takes much character to resist the temptation of giving in to unreasonable monetary requests from friends. Be firm with your decision and believe that a true friend will not hold it against you if you choose to keep your money to yourself.

Things could be different if it’s your family that’s borrowing money, subscribe to Ready To Be Rich so you won’t miss out when I write about this matter.

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Photo courtesy of NYTimes

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