If you've ever loaned money to a family member, you know how awkward -- even uncomfortable -- it can be. Sometimes the risk outweighs the reward. The same holds true when it comes to leading money to colleagues. If you're considering helping a junior associate out with a loan, here are some ways to protect yourself.
If you’ve ever loaned money to a family member, you know how awkward -- even uncomfortable -- it can be if things go awry and payments are late. Lending to a family member isn’t always a combustible situation, but sometimes the risk outweighs the reward.
The same is often true, maybe more so, when it comes to physicians loaning money to colleagues. You might only see your deadbeat brother-in-law at family functions and on holidays, but your interaction with a business colleague that hasn’t paid you back occurs on a daily basis.
“You can look like the hero when you lend the funds that are needed,” explains John Graziano, CFP, CPA and PFS, of Graziano & Co. in Bayonne, N.J. “But then when repayment becomes an issue, it causes for an extremely intense work environment.”
With a properly prepared loan agreement, however, much pain and discomfort can be avoided.
What's the Reason for the Loan?
More often than not, senior physicians are the ones loaning money to junior associates. Regardless of the reason for the loan, Graziano says, it’s important for that information to be known upfront. “If it’s a worthwhile cause -- if they’re buying a house, helping with a kids college tuition or planning a wedding -- then at least you know it’s a knowledgeable, prudent junior associate you’re lending to,” he says. If the reason the associate needs the loan is to pay off credit-card debt, tax liens, or past due amounts with other lenders, and you didn’t know it, “the same could happen to you eventually,” Graziano says.
One of the most common reasons for physicians to loan money, however, is to help a colleague buy in to a share of the practice. Graziano recalls one physician client who has had success making loans for several junior associates. The loan agreement stated that if the funds are not paid back by the agreed-upon terms, then paychecks would be withheld to repay the debt.
“It never comes to that because the associate knows that it has to be repaid, as opposed to (an informal) promise that ‘I will pay it on the first of the month,’ ” Graziano explains. “Putting in the term of some mandatory repayment usually helps to keep it on a better playing field.”
When Separations Occur
A loan agreement between colleagues should contain specific details about the loan, including the reason for the loan, the terms or length of the loan, and any penalty or interest escalation if the loan is not paid on time.
The real problem with lending to a colleague, Graziano says, is what happens when the borrower leaves the practice. At that point, the loan becomes a higher risk to the senior physician.
“The loan should still be repaid within the period of time that the original note had promised,” Graziano says. “For example, if I said I’m going to pay you back by January first of next year, and I leave employment in March and the loan converts to a regular monthly payment, it should still be paid off by that January date originally discussed,” he says, adding that the borrower should not expect to receive additional time to pay off the debt.
Where loans are meant to facilitate a colleague buying into a practice, Graziano suggests making smaller loans in stages, so that the debt burden is spread out over time -- thus reducing the chance of the borrower defaulting. For example, if the borrower is buying 10% of a practice, agree that the purchase will be made in 1% increments over time. “The associate can buy in X many shares per month, as opposed to needing $500,000 to buy into 20 percent of the practice all at once,” he says.
Use Influence With a Real Bank
Once a physician has made a loan to a colleague, it may be necessary to draw the line at some point -- especially in the situation of co-signing a loan, Graziano says. “I tell clients that what they should say to the junior associate is, if you go outside the building and look up and it doesn’t say ‘bank’ outside the building, perhaps we shouldn’t even discuss the aspect of co-signing.”
Finally, he suggests that physicians use the discussion of loaning money as an opportunity to help a junior associate develop his or her own banking relationship with a trusted financial institution. “If I’m the senior partner in a successful medical practice and I have a good relationship with XYZ bank, perhaps that relationship will carry on to the junior associate,” Graziano says. “The bank is already familiar with the practice, knows it’s a successful practice, so the junior associate (might be) given a little more credit than the person walking in off the street.”