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Private Lending (11) – Forbes-Recognized Borrower
First of all, let me say that I’m quite immune to any name-dropping. After all, I’ve been burned too many times, so I focus on substance rather than appearances. But considering the readership, I decided to include this headline, and there’s absolutely no padding. When we received this loan application, the broker on the other side emphasized that the applicant was on the Forbes list. We checked, and indeed, the name was on the list, with a very high net worth, but not a household name. Actually, this was a negative factor for us. Whether you’re on this and that list, the more companies and assets you have, the more complex your debt structure, and the greater the variety of unpredictable risks. Sure enough, upon closer look, the mansion used as collateral is worth over ten million, with no issues regarding the area and the house itself, but there were already a few mortgages on title, making the LTV to almost 90% already! So, while the absolute value of the Equity looks good, I can’t lend even a dollar if the Loan-to-Value ratio for houses under a million can’t exceed 75%, let alone for a mansion. If it goes to power of sale, there would be a significant discount, and the Loan-to-Value ratio would need to be well below 60% to even consider it. So, this deal is definitely a no-go.
On a side note, not only am I indifferent to name-dropping, but sometimes I’m even repelled by it because I’ve had too many bad experiences. Dealing with borrowers from affluent neighborhoods who want to borrow money, such as doctors and business owners, may sound low risk enough, but in reality, when you look at the documents, it’s quite common to see towering debts and cashflow problems. Bankruptcy announcements are not uncommon either. There can even be mental issues! They can even harass and threaten lenders and refuse to comply with court judgments (I won’t vent about the legal system here, otherwise, I can go on for days lol). The higher the “net worth” appears to be, the more problems arise. Handling these matters consumes so much energy and trouble that you end up not being able to do anything else properly. You’re just stuck dealing with these lunatics, and it’s truly not worth it.
So, later on, both in business and in life, I adhered to one ironclad principle: the simpler, the better. If someone comes to you and drops a bunch of names, it’s highly likely that they have no product and no cashflow. Human nature tends to emphasize what one doesn’t have, so the more hollow, the more exaggerated. Those who actually have something can explain things clearly in three sentences, and everyone will quickly know whether there’s mutual benefit or not. If someone calls me and talks for more than five minutes before sending a deal, I know there’s definitely something fishy. No matter how much selling they do, my go-to phrase is, “I’ll review the documents and get back to you.”
And every time I review the documents, there are red flags.
The same goes for partnerships. Most of the time, I end up at a loss. The other party throws around titles, and resources, and back when I was young, I believed whatever people said. I had a natural trust in human beings, so I readily agreed. I invested my resources, time, and energy according to their promises, but then, nothing ever happened. Everything was on my side, while the other party just lay there, doing nothing, but when it came to splitting the profit that I made, they were very fast running here. As for the resources they claimed to have, they kept saying they had them, and you know they do, but they just won’t share, and you can’t do anything about it.
So, words, titles, and claimed resources are all truly worthless. Most of the time, you don’t get to enjoy any benefits, but you end up carrying all the risks for others. Only contracts signed on paper and the actual amount that enters your account without restrictions based on the contract are the only proof of the other party’s sincerity.
The same goes for life.
For example, a big characteristic of marriage is asset binding and risk sharing. Translated into reality, it means that your assets may become someone else’s, and someone else’s risks may become yours. This is akin to deep collaboration in business, so you must be extremely cautious. For example, if anyone wants to enter into marriage, if they come to ask me, I would definitely advise them to make a prenuptial agreement. A prenuptial agreement is not about protecting the wealthier party, but it’s a procedure to understand the financial situation of both parties in advance, especially their debt situation, and see if you can handle it, primarily assessing how much risk you can bear. The more assets and net worth the other party has, especially if you find out that their assets far exceed yours, the more careful you should be, because it’s highly likely that their debt situation is more complex, they have more resources to mobilize, and there are a ton of troubles and dramas. If the relationship hits a dead end in the future, they can turn your assets into theirs and transfer their debts to you in an instant, and you’ll be powerless to resist, with nowhere to cry. For example, you might think the other party is a Forbes celebrity, but in reality, their assets are already mortgaged up to 90%, such as if a business venture fails, the debts will be jointly shared by the couple. You really can’t go into battle unprepared. So you must understand clearly beforehand, and the purpose of understanding is to prepare for the worst-case scenario, meaning if the other party collapses, their problems become yours, can you still hold on, solve the problems, and protect yourself from irreversible harm to your financial and physical well-being?
So even in life, the same principle applies: we don’t expect to take advantage of other people, but we must have ways to protect ourselves from being taken advantage by others. If, after the whole process, you find that you really can’t handle it, talk about it upfront. Put the difficulties on the table for discussion. If the other party is sincere, they will definitely consider your perspective and give you some additional assurance in action. After this, you can adjust your decisions according to the new situation, seeing if you’re willing to take on the reduced risk.
After all, actions are the only proof of true intent.
And never force yourself into a situation. You always have the option of “not doing it”! If the deal isn’t good, you can choose not to lend, and if you can’t handle everything if the other party collapses, you can choose not to marry. Stick to your principles, and ignore any of the other party’s stories. Apart from reducing a lot of noise in business, you’ll have the time to focus on your work and eliminate a lot of trouble and future problems in life.
This turned out to be a bit lengthy haha. In the next post, I’ll talk about whether it’s feasible to lend to friends.