Risks and legalities of lending money

You are not a bank but you decide to lend someone money…..

There are a lot of families I see where they have lent a considerable amount of money to their adult working children with the expectation that it will be paid back, but there is nothing actual concrete to ensure it happens.

The accountability of those borrowers is in question and if they don’t have any consequences to not repaying the debt, the likelihood is that it will not be repaid.  It’s also emotionally difficult for a parent to sue a child over an unpaid loan.

A huge proportion of start up businesses are funded by family members lending money. It is common to see that business flourish and money being made (and spent on luxuries) but the loan never repaid.  To top off complications there may be a divorce involved and the ex spouse is going for their share of the assets bought by the income of the business.  Or worse still, after a few good years the business owner goes bankrupt due to sudden bad decision making and the trustee in bankruptcy comes along to collect debts for the creditors.  But the family members are not really recognised as creditors probably because nothing was in writing, nothing was secured and the “family loan”   looks like a sham to the trustee who sees it sceptically as a ploy to save the family assets from bankruptcy.

Clearly there are risks involved in lending money as a private lender.

Many private lenders are not aware of how they can get security for their loan- just like the banks do when they register a mortage over the borrower’s property.  They fail to register a mortgage or charge following settlement of the loan or if they attempt to do so they find that they are unable to due to the loan agreement not being properly drafted.

Security for your loan

Laws about mortgages and caveat registration differ from state to state. For example in Queensland a caveat may lapse within 3 months whereas in Victoria the same type of caveat may stay on the title indefinitely until withdrawal or a mortgagee sale.

The other complication about getting security for lending is that there may already be other lenders that have security and therefore gain priority of payment if the property sells.   An up to date title search is therefore a good idea before the lending agreement is made and registration of the security should be done at the same time or as soon as possible after the money is advanced provided the written agreement gives grounds for doing so.

When lending to a company

If you are lending to a company you may also need to check if there are any registered fixed or floating charges over the company which may affect the priority of who will be paid first or paid at all in the unfortunate event of the company not being able to meet it’s debts and the assets having to be sold.   If the company has equipment there may be chattels mortgages or securities registered so a PPSR search should be undertaken.

Spend hundreds but don’t lose tens of thousands of dollars

For the cost of a simple loan agreement and registration of caveat or mortgage, you could safeguarding the loss of tens if not hundreds of thousands of dollars loaned out.  You will find that prior to the loan advance being made the borrower will be more than willing to cooperate with the agreement and security lodging process, but after the money is already lent, not so much.