When times get tough, we all hope our friends and family would be there to lend a helping hand. But if we come up against an emergency, especially if we have a small to medium business, we need to be able to first apply a ‘back up plan’, which may involve borrowing money. Ask yourself – is this possible? Or would we have to borrow from family to get us over that hump? A study has found more than 20% of Australians have lost friends over borrowed money. So what’s your contingency plan?

By Graham Doessel, Founder and CEO of MyCRA Credit Rating Repairs and www.fixmybadcredit.com.au.

Smart Company published a story today titled ‘SMEs warned on borrowing from family and friends as monthy “friendly” debt pile tops $1.6 billion a month’, reporting on a survey commissioned by the Commonwealth Bank showing the average Australian borrows more than $200 from loved ones every month.

“This equates to more than $1.6 billion a month, with “unforseen or emergency situations” identified as the most common reason for borrowing (49%)… While the majority of respondents (85%) say they were brought up to repay their debts, 49% have experienced disagreements when it comes to paying loans back,” Smart Company reports.

The study is based on a survey of 1,193 Australians aged 16 to 39.

Commonwealth Bank executive general manager of cards, payments and retail strategy, David Lindberg says millions of Australians rely on informal borrowing networks.

[But] borrowing money from friends and family can be the cause of disagreements, whether that’s over the amount or best way to pay someone back,” Lindberg said in a statement to Smart Company.

A back-up plan

Anyone who owns their own business, their own home or has any sort of significant debt needs to spend some time thinking about what the go-wrongs could be, and set up a plan for what to do. Then they can stop worrying about the go-wrongs and keep going forward with confidence.

What if we lost our job? What if interest rates went up significantly? What if business went down really fast – such as what happened to many people after the GFC? What if someone did the wrong thing by us? What if we were short one month or two? What if we got sick?

I have come up against some go-wrongs in my time. In the early 2000’s I owned my own Promotions Business. Like many salespeople, I was good at talking, but not so good at the paperwork. This led me to bring in a mate who was good at paperwork.

The bloke I brought in was good alright – he was good at stealing over $130,000 of borrowed funds from the business over four months. So repayments were due and I had no money to make them. After receiving some bad advice, I declared bankruptcy.

Later I learned the bankruptcy was not necessary, there were some things I could have done differently, and I would have been alright.

Hindsight is wonderful, foresight is golden. In my next business ventures, I instilled a ‘back-up plan’ to cover an emergency.

Little did I know, in time I would require one.

After a couple of years building up my mortgage brokerage, at the height of its success, I was dealt a blow that too many have been dealt. I was told I had Cancer. I powered on at work – but I am sure I wasn’t as productive in my own business as I would have been if I had been healthy. What saved me and my business was my back up plan. Never did I let my accounts go unpaid. My credit file remained squeaky clean through it all. Once I recovered, I was able to bounce back financially and get myself to where I am today with MyCRA.

Here are some things for you to consider about constructing your own back-up plan:

1. Get good solid financial advice from a recommended and trusted advisor. They may offer ideas you hadn’t considered in the formulation of your back up plan from what sort of ‘buffer’ you would need to be comfortable, to recommendations for relevant products and services.

2. Consider insurance. Income protection, health insurance, disability insurance among others could all be viable options for you. Refer to the government’s business website for more information on insurance if you run a SME.

3.  Could you borrow money if necessary? Ensuring all of your accounts are paid on time is the best way to secure the ability to obtain credit in the future. But sometimes mistakes happen with your credit file. Listings can be put there incorrectly, and these could see you blacklisted from credit unnecessarily. Obtain your credit report for free every year from one or more of Australia’s credit reporting agencies. Obtain both your consumer and commercial credit files and make sure they are accurate. If your credit report does contain inconsistencies, get those defaults removed from your credit file if they shouldn’t be there NOW. Don’t wait until something happens – sometimes it can take time to repair the credit file damage.

When you need emergency money

1. If you do need to borrow money for an emergency – decide early whether the problem is short or long term. Don’t bury your head in the sand and ‘hope’ that things improve when the problem is really long term. Borrowing from Peter to pay Paul is the quickest way to get you or your business in to long term debt. Remember, overdue accounts of more than 60 days will show on your credit file for between 5 and 7 years – depending on the listing.

Even if you can get over the hump now – you will not be able to borrow to expand while you have bad credit history. Long term, you are better off addressing problems now – whether that be to sell the house, the business, downsize or re-group. If you are in genuine financial hardship, talk to your bank about Financial Hardship relief on any borrowed funds – this is a legitimate option which your bank is required to provide you with under certain circumstances.  Act now to save your future rather than spoil your credit rating.

2. If you believe you will have financial problems for some time, consider a Financial Counsellor. Visit the Financial Counselling Australia website for more information.

3. If you are going to borrow from family and friends set the terms in stone. Consider getting the terms of any loan down in writing and signed by all parties are aware of what the conditions of the loan will be. Then stick to it.

This post is intended as information only and in no way is intended to replace or constitute professional financial advice. For money help, you can look at the Government’s Money Smart Website, or contact a professional Financial Advisor.

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