I lent a six-figure sum to a charming founder with a real product, a real facility, and a great story. He defaulted, strung me along with fake wire transfers, and a court judgement was eventually entered against him. That story is documented in full here. This article is the checklist I wish someone had handed me before I sent the money.
Before you even discuss terms
- Search the courts. County court records, state court portals, and PACER (federal) will show you judgements, liens, and lawsuits under the borrower's name and business entities. Ten minutes, free or nearly free. A judgement in someone's history is the single most predictive document that exists — take it from the person who created one.
- Verify the entity. Look up the LLC or corporation on the Secretary of State website. Is it active? Who are the officers? How old is it?
- Talk to people who've been paid back. Not references the borrower hands you — those are curated. Ask: "Who else has lent to you, and can I call them?" Hesitation is data.
Verify the deal, not the vibe
My biggest mistake wasn't skipping diligence — it was doing the wrong diligence. I toured the facility and tasted the product. All real. What I never did was verify the specific transaction my money was supposedly funding: a bulk-pricing deal with a co-packer.
- Contact the counterparty directly. If the money is for a supplier deal, call the supplier. Confirm the order, the pricing, the timeline — yourself, not through the borrower.
- See the paper. Purchase orders, invoices, contracts. If the deal is real, the paper exists and the borrower will be glad to show it.
- Follow the money's path. Where exactly does your wire land, and what controls exist on it once it does? "My operating account" is not a control.
Paper the loan like a bank would
- Promissory note drafted by your attorney — not a handshake, not the borrower's template. Dates, amounts, interest, default terms, attorney's fees clause.
- Collateral and a UCC-1 filing. Secured beats unsecured. If the business has equipment, inventory, or receivables, file the lien. A personal guarantee on top of it.
- Controlled disbursement. For a specific-purpose loan, pay the counterparty directly or use escrow. If the loan is "for bulk pricing from the co-packer," the cleanest structure is money that can only go to the co-packer.
- A repayment schedule with teeth. Specific dates, specific amounts, and a written definition of default — because when the date arrives, you don't want to debate what was agreed. I learned this when my borrower claimed he thought he had another month.
If repayment starts slipping
Everything the borrower says after a missed payment should be treated as unverified until proven. Mine produced a rotating cast of explanations — a wire that was "sent," an ACH "in process," a bank that needed to "pull the money back." Each story bought him weeks.
- Verify payment claims at the source, same day. A wire has a confirmation number. An ACH has a trace number. Ask for it in writing; call the bank.
- Get every promise in writing — even just a text. My text messages became evidence.
- Don't renegotiate more than once. One restructure is grace; two is a strategy — his, not yours.
- Move to an attorney early. Every week you spend accepting stories is a week of your money funding something else. The demand letter and lawsuit should come while there may still be something to recover.
This article describes my personal experience and general practices I now follow. It is not legal or financial advice — for an actual loan, hire an attorney licensed in your state. It will cost you a fraction of what skipping one cost me.