Nosa received an offer from a long time friend Muyiwa for a loan of N30million to finance a diesel business. In return Muyiwa will pay Nosa N2million every month for one year and then repay the N30million at the end of the period.
To pull funds and spread the risk, Nosa involved some of his colleagues at work and in no time raised the N30million. Nosa signed an M.O.U with Muyiwa and disbursed the money. After six months of meeting payment obligations as agreed, Muyiwa started paying back haphazardly till he eventually stopped paying back. . After much haggling Nosa requested to terminate the deal and asked for his money back as it became obvious that all Muyiwa was doing was giving them back their capital in pretext that it was their return on investment.
Another chap, Chris lost his job following the banking crisis of 2008.His friend who also lost his job in the same bank approached him with a business from his Aunt who deals in black oil. They both invested N1million each from their disengagement benefits. After two months, the Aunt was nowhere to be found sending the guys into panic. They eventually found her and she informed them that she lost the money as the deal went bad.
Both cases ended up with the Police and as we speak is in their cold case files with no solution in the horizon for the victims.
The most prevalent form of bad debts are those we give to friends, family or loved ones. It has shattered relationships and made enemies of people. Some have even lost their life fortunes due to this. Whilst there are no foolproof ways to avoid falling victim, the following tips, which I have drawn from, the experience of others can at least help avoid falling into the trap thus being another victim.
1. Number one rule is to remember it is easier to borrow and lend than to return after lending. If you have this at the back of your mind all the time then your default response will always be a NO. But there are cases that require compassion too. When they arise your adamant nature will warrant that you reverse the notion by making it difficult to lend and easier to refund after lending.
2. Create a barrier by Introducing third parties to the transaction. People who borrow money or seek your money for investment always come with compelling and convincing tales. They are also very much in a hurry to get the money from you giving you the impression that all hell is about to let loose if you don’t act quickly. The problem however is that, when it comes to getting your money back, that urgency is suddenly transforms to pestering. So for those who are vulnerable to sweet talks, one way of deflecting a suitor is to refer him or her to a third party. Tell your borrower you understand the situation and want to genuinely help but your lawyer or Accountant has to work out the details. That way someone else who is neutral and less biased is suddenly the decision maker in all of this. Whilst in real terms the final decision lies with you, a third party may help you see other risk that you may have missed and also put the borrower under pressure to convince another person.
3. Ask for a Guarantee or Collateral: Stemming from 1 above, to make it difficult for the suitor/borrower give them conditions that must be fulfilled before you part with your money. For example, ask for a collateral or a guarantee from a recognized cleric. You sill be shocked that even a common request for an application letter can often be difficult for borrower to produce which in no small measure sends them away naturally. A borrower who doesn’t show seriousness to meet this conditions will more often that not break their promise to refund.
4. Confirm as reasonably as you can proof of need for the money – This can be difficult and not applicable in some cases but if applied it can help avoid any incidence of fraud or default. For example, if they come to you for money to finance an LPO (Local Purchase order) simply ask for a copy of the LPO. If they do not have it then don’t give and if they do, ensure that it is the borrowers name that is on it and not a third party.
5. Obtain quasi security documents like post dated cheques – Unsecured loans in financial terms means the borrower did not give you a registered collateral to borrow money from you. However, you can still request for other documents such as post dated cheques, promissory notes etc. Whilst subordinate to registered collateral such as land, they can be quite useful in terms of settlement. A bounced cheque for example is an offence punishable by law.
6. Keep in touch regularly and pester where necessary – Most of us make the mistake of not keeping in touch with our debtors. Because they are friends we hesitate to bring up the issue even when we are constantly in touch. Finance experts advise that we continue to pester and remind our debtors that they owe us. This creates a lingering sense of responsibility, which can only help you recover your money.
7. Weak M.O.U’s don’t work – Most people believe when an M.O.U is signed then the deal is as good as formalised. Whilst true technically, it hardly works practically. I do not believe it is enough to just draw up an M.O.U. A proper agreement must be drawn up by a lawyer, stating amongst others, responsibility of the parties, amount being borrowed, repayment terms and tenor, acceptance of the offer by the borrower, actions in case of dispute, signature of the borrower and lender and witnesses. All of this must be prepared and executed in the presence of your lawyer.
8. If you can’t do the above then consider the loan a gift in the event that it is unpaid