There is a time in all of our lives that we are approached by someone close to us (a friend, associate or family member) for a loan to either start or re-capitalize their business.

If we were approached by a stranger off the street, the decision would be easy but when approached by someone close to us - there are other issues (outside the financial decision) that tend to cloud our judgment. When it comes to money, you have to put those aside.

To protect yourself, think about the following.

If you are not financially able or are right there on the edge - you have to say no or you will only bring yourself down. The requestor should understand!

Know that the risks are heightened in these situations. If there are losses, you can't just write those losses off or replace them from depositors or investors - like banks do.

Try to understand the reasoning behind the request. Some people have already proven, over and over again, that they cannot handle money - might be why they are approaching you in the first place.

Or, does the potential borrower just need a new infusion of capital to get their business off the ground and that they have the ability to actually execute the plan and follow through with it. They might have been turned down by other lenders solely due to those lenders' extremely high standards.

The bottom line here is to judge them and their reasoning for their request. Are they a good risk or is there something else telling you to go against your gut feelings?

Act like a lender, maybe not to their high loan policy standards, but in evaluating the overall potential of you getting paid back. This could mean looking at credit, tax returns, business plans and background checks as well as valuing and placing a lien on any collateral.

Like any lender, you want to ensure 1) That they have a willingness to repay you and not just take your money and run (being the good person they know you to be) and 2) the ability to repay the loan - hard to give money to someone whom you know from the very beginning cannot repay the loan.

Also, try to determine if they have self-funded the project or business as much as they can. Not a good idea to give money to someone who is not willing to put their own money in the game - especially if they understand the risks better then anyone else.

Remember, if they are coming to you, it probably means that they have been turned down before. Thus, if you choose not to make the loan, they should understand. But, if you chose to move forward - find a way to structure the deal in a way that protects not only you - but them as well.

Get everything in writing. Many times, when these loan deals go bad, it comes down to a perception of what was said or what was understood. Then add in bad feelings and those memories of what actually happened in the beginning tend to get very clouded.

By putting it in writing, including what happens if/when a payment is late or if the borrower defaults or even how those funds should be used, you end up protecting both parties. And, should there be a cause to seek recourse - the process should be easy and quick, potentially saving any relationship.

Moreover, by having this contract and its terms in writing, you demonstrate beyond a doubt that you expect to be repaid with interest.

IRS's Applicable Federal Rates

Know the IRS's rules on charging interest: If you don't charge interest, the IRS can still tax you on what they figure you should have earned in interest. The IRS has many rules regarding making personal loans - in particular, what rates you should charge - find out more from the IRS's Applicable Federal Rates.

"Each month, the IRS provides various prescribed rates for federal income tax purposes. These rates, known as Applicable Federal Rates (or AFRs), are regularly published as revenue rulings."

Further, you should be compensated - not just for the risk that you are taking but to offset the costs of taking those funds away from other investment opportunities that could be earning you a solid return on that cash.

Know that most borrowers will not treat you like they would a lender and many don't expect you to act like one. However, you do have a right to get periodic updates about the project or business being funded

Remember, in the beginning, before any money changes hands, you have all the power. But, after the loan is funded, the power shifts to the borrower. Thus, to retain some of that power and ensure that the loan process and servings goes as you want - put it in writing - including what happens after the loan is funded.

So, it is OK to ask for updates - just don't meddle too much as that could put the repayment of the loan at risk, as well as your relationship - something neither party wants.

Bottom line: Most guru's will tell you not to lend money to your friends and family but year after year, we continue to do it. Just make sure that you protect yourself and are making the loan decision for the right reasons.