Recently when a kid wanted to borrow Rs. 20 lakhs, he went to a bank but got bad rates of interest. The documentation was painful, and the family was not sure whether it was the right thing to do.
A rich uncle – actually his dad’s younger brother (kids chacha) offered the loan at exactly the same terms as the bank – but without very complicated documentation.
The uncle asked me the following questions:
1. Can I afford the cash flow: the answer was a resounding yes.
2. Can I afford the loss: again this amount was about 1% of his net-worth, so was not an issue.
3. Is the interest fair on both the parties: My argument was yes.
I had some more questions like:
– how will you react if he does not repay?
– there is no tax exemption for him, find out how will he react if he knows that?
– after repaying a portion, IF HE WERE to drop dead, how will you react?
– if he stops paying after say 3 years, what will you do?
– if interest rate changes for companies, how will you react?
There are many such imponderables for which we do not have an answer, so what to do….?
If you are doing private deals…inagine the risk that you are taking 🙂
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