Seeking advice on a small business loan I am looking to extend to a long time client

[Carlo D.]

I have a client of 15 years who runs a route selling business for 40 years. Just today he asked if I knew of anyone who does business lending. He' looking to borrow $30,000 for 6 months at 25% to 30%. (he said he's ok with this since this would be an unsecured loan)

 The purpose of the loan would be business expenses, growth through advertising and for new route listings.   I told him I'd look around, but I'm considering funding it myself. I never did this before and I have a bit of capital as I'm looking to get into my first real estate deal out of state in the next 3 to 6. months. If I decided to do this, how would you recommend I go about it? What loan docs would I need a lawyer to draft? Thank you in advance

[Patrick Roberts]

Don't touch this unless you can afford to lose the entire loan. Recovery on a single, charged-off unsecured business loan will likely be less than 10 cents on the dollar. If you decide to entertain this, due diligence will involve digging deep into the business financials to understand cashflow, solvency, and liquidity, his personal finances, and searching for any liens or UCCs in place. 

Given that he's got a long history in business but is struggling to cover $30k in Op-ex and marketing spend, my guess is that this is either not very well managed or is in distress. The fact that he expects $30k for 6 months on a 1.25-1.30 tells me that A) he's either borrowed in the MCA/alt funding/SME hard money space before or is aware of it and B) he's been turned down by the lenders he's already talked to. Coupled with the economic slowdown that's occurring, I'd be cautious to say the least. Borrowing this kind of money to fund aggressive spend on growth in a high gross margin industry is once thing; covering Op-ex shortfalls is indicative of near term distress. 

For docs, at a minimum, you'll want a promissory note, PG, loan agreement, and a security agreement to attach to whatever collateral you can reach. You'll also need to file a UCC, although you'll most likely be stacked behind a blanket UCC from some bank. 

Last thing - APR cap in NY was 65% last I checked. Check your math to make sure you're not violating this or your contract could be voided.

[Carlo D.]

Quote from @Patrick Roberts:

Don't touch this unless you can afford to lose the entire loan. Recovery on a single, charged-off unsecured business loan will likely be less than 10 cents on the dollar. If you decide to entertain this, due diligence will involve digging deep into the business financials to understand cashflow, solvency, and liquidity, his personal finances, and searching for any liens or UCCs in place. 

Given that he's got a long history in business but is struggling to cover $30k in Op-ex and marketing spend, my guess is that this is either not very well managed or is in distress. The fact that he expects $30k for 6 months on a 1.25-1.30 tells me that A) he's either borrowed in the MCA/alt funding/SME hard money space before or is aware of it and B) he's been turned down by the lenders he's already talked to. Coupled with the economic slowdown that's occurring, I'd be cautious to say the least. Borrowing this kind of money to fund aggressive spend on growth in a high gross margin industry is once thing; covering Op-ex shortfalls is indicative of near term distress. 

For docs, at a minimum, you'll want a promissory note, PG, loan agreement, and a security agreement to attach to whatever collateral you can reach. You'll also need to file a UCC, although you'll most likely be stacked behind a blanket UCC from some bank. 

Last thing - APR cap in NY was 65% last I checked. Check your math to make sure you're not violating this or your contract could be voided.

 Thank you @Patrick Roberts. I guess the mere fact that I felt I had to get a 3rd party's point of view already tells me I was uneasy with the proposed transaction to begin with. I will stay away.