Don't Co-sign Without Collateral

I hold that no man ought ever to indorse a note or become security, for any man, be it his father or brother, to a greater extent than he can afford to lose and care nothing about, without taking good security. Here is a man that is worth twenty thousand dollars; he is doing a thriving manufacturing or mercantile trade; you are retired and living on your money; he comes to you and says:

I believe no man should ever guarantee another man's debt without getting reliable collateral, even for his father or brother. He should never risk more than he can afford to lose without caring about the loss. Suppose a man is worth twenty thousand dollars and runs a thriving manufacturing or trading business. You are retired and living off your money. He comes to you and says:

"You are aware that I am worth twenty thousand dollars, and don't owe a dollar; if I had five thousand dollars in cash, I could purchase a particular lot of goods and double my money in a couple of months; will you indorse my note for that amount?"

"You know I’m worth twenty thousand dollars and don’t owe a dollar. If I had five thousand dollars in cash, I could buy a particular batch of goods. I could then double my money in a couple of months. Will you guarantee my loan for five thousand dollars?"

You reflect that he is worth twenty thousand dollars, and you incur no risk by endorsing his note; you like to accommodate him, and you lend your name without taking the precaution of getting security. Shortly after, he shows you the note with your endorsement canceled, and tells you, probably truly, "that he made the profit that he expected by the operation," you reflect that you have done a good action, and the thought makes you feel happy. By and by, the same thing occurs again and you do it again; you have already fixed the impression in your mind that it is perfectly safe to indorse his notes without security.

You think about his twenty thousand dollars and decide there is no risk in guaranteeing his loan. You want to help him, so you sign without taking the precaution of getting collateral. Soon afterward, he shows you the loan document with your guarantee canceled. He tells you, probably truthfully, "that he made the profit he expected from the deal." You think you have done a good deed, and the thought makes you happy. Later, the same thing happens again, and you agree to guarantee another loan. By now, you have convinced yourself that guaranteeing his loans without collateral is perfectly safe.

But the trouble is, this man is getting money too easily. He has only to take your note to the bank, get it discounted and take the cash. He gets money for the time being without effort; without inconvenience to himself. Now mark the result. He sees a chance for speculation outside of his business. A temporary investment of only $10,000 is required. It is sure to come back before a note at the bank would be due. He places a note for that amount before you. You sign it almost mechanically. Being firmly convinced that your friend is responsible and trustworthy; you indorse his notes as a "matter of course."

But the trouble is, this man is getting money too easily. He only has to take your promissory note to the bank and exchange it for cash, minus a fee. For the time being, he gets money without effort or inconvenience to himself. Now watch what happens. He sees a chance to speculate outside his business. He needs only $10,000 for a temporary investment. The money is sure to come back before a bank note would be due. He puts a note for that amount before you. You sign almost without thinking. Because you firmly believe your friend is financially sound and trustworthy, you guarantee his notes as a "matter of course."

Unfortunately the speculation does not come to a head quite so soon as was expected, and another $10,000 note must be discounted to take up the last one when due. Before this note matures the speculation has proved an utter failure and all the money is lost. Does the loser tell his friend, the endorser, that he has lost half of his fortune? Not at all. He don't even mention that he has speculated at all. But he has got excited; the spirit of speculation has seized him; he sees others making large sums in this way (we seldom hear of the losers), and, like other speculators, he "looks for his money where he loses it." He tries again. endorsing notes has become chronic with you, and at every loss he gets your signature for whatever amount he wants. Finally you discover your friend has lost all of his property and all of yours. You are overwhelmed with astonishment and grief, and you say "it is a hard thing; my friend here has ruined me," but, you should add, "I have also ruined him." If you had said in the first place, "I will accommodate you, but I never indorse without taking ample security," he could not have gone beyond the length of his tether, and he would never have been tempted away from his legitimate business. It is a very dangerous thing, therefore, at any time, to let people get possession of money too easily; it tempts them to hazardous speculations, if nothing more. Solomon truly said "he that hateth suretiship is sure."

Unfortunately, the investment does not pay off as soon as expected. Another $10,000 loan must be taken out to pay off the previous loan when it comes due. Before the new loan comes due, the investment has proved a complete failure, and all the money is lost. Does the loser tell his friend, who guaranteed the loan, that he has lost half his fortune? Not at all. He does not even mention that he has been speculating. But he has become excited, and the urge to speculate has taken hold of him. He sees others making large sums this way (we seldom hear about the losers). Like other speculators, he "looks for his money where he lost it." He tries again. Guaranteeing his loans has become a habit for you. With every loss, he gets your signature for whatever amount he wants. Finally, you discover that your friend has lost all his property and all of yours. You are overwhelmed with astonishment and grief. You say, "This is terrible. My friend here has ruined me." But you should add, "I have also ruined him." Suppose you had said at the start, "I will help you, but I never guarantee a loan without enough collateral." He could not have borrowed beyond those limits, and he would never have been tempted away from his legitimate business. So it is very dangerous, at any time, to let people get money too easily. If nothing else, easy money tempts them into risky investments. Solomon spoke truly when he said, "Whoever hates guaranteeing another person's debts is safe."

So with the young man starting in business; let him understand the value of money by earning it. When he does understand its value, then grease the wheels a little in helping him to start business, but remember, men who get money with too great facility cannot usually succeed. You must get the first dollars by hard knocks, and at some sacrifice, in order to appreciate the value of those dollars.

The same goes for a young man starting in business. Let him learn the value of money by earning it. Once he understands its value, give him a little help getting his business started. But remember, men who get money too easily usually cannot succeed. You must earn your first dollars through hard work and some sacrifice to appreciate their value.