Doing any type of serious business with friends and relatives can be a disaster looking for a place to happen. The potential for long term damage to the relationship is enormous. Lending money to people that you care about is risky. Before you choose to step into this quagmire, plot your exit strategy based on some common sense guidelines.
Limit the size of the loans.
Never lend more money to a relative than you can afford to walk away from if it is not repaid. People who loan five dollars rarely lose their composure if it is not paid back.
Treat the loan differently if it is attached to some type of enterprise.
In that case, treat it like a business transaction. Get everything spelled out in writing. It should be signed and notarized. It is even better if you can enter into an agreement to be a part owner of the business with some say in its operation. If the business fails, you may lose your money, but you can fail together with you loved one. It will reduce the likelihood of long term resentment coming between you.
Set a repayment date for loans to friends and relatives.
This will give you an easy way to ask for the money back. Make an agreement with the person to inform you of any problem that may delay the repayment. At that time, you can renegotiate your terms and keep moving forward.
It is best if you will treat the loan as a gift.
You can let the other person think that it is a loan. In you mind, decide that as a gift, you will not really expect it to be repaid. If the loan is paid back, you get a bonus. Generally, you need to value the relationship more than the money in order for this technique to work.
Make it clear that you do not want the borrowed money to be a problem.
Let the person know that if the money is going to put a chill on your relationship, you will not make the loan. You may have to state this two or three times for it to sink in. If you notice the person is avoiding you, sit down and talk about it together and work out a solution. You may want to tell your friend or relative at that point the money was a gift and does not need to be repaid.
If the money is a true loan, do not make additional loans until old ones are paid back.
There is no reason to throw good money after bad. Since this type of transaction strains relationships, it is best if you learn to decline when you are asked. The point here has two sides. You have to protect yourself financially. And, you need to evaluate your friendship based on whether you believe a friend that keeps asking for more money after not repaying you the last time is really your friend.