In one of my previous articles, I cautioned readers to be wary of lending money to others. Today I am going to talk about the scam which your borrower may trick you into when borrowing and repaying your money.

I once joined a chat group, where people doing small businesses come together and chat about their own business as well as everything else about life. For a period, the group was very active and everyone was friendly with each other, even organising meet ups and stuff. It was the kind of group where finally everyone found like-minded people and could fit in very quickly.

Naturally, there were also some private conversations and dealings among some of the members. One of the dealings was about a husband and wife couple borrowing $300,000 from another member of the group to run their business, probably promising an interest rate above the market value. There was a proper contract regarding the borrowing. All seems well, until the couple kept on delaying the repayment and later refusing to reply messages.

Like what happened to me, except on a much bigger scale, this couple refused to pay back the money despite having the means to do so. The husband was earning $8000 to $10,000 a month, and the wife was bringing in some income too. They were living in an expensive house, have the money to raise 4 children (the 4th was conceived during the period of debt), a maid and a dog and was always going around spending money living the high life.

My case was much smaller. I had lent $20 to a person who later refused to pay back despite having the money to watch movies and eat good food. I was 15 that time and he was 16. My allowance was not much and I had to walk one hour to school everyday to save on a 45 cents bus fare on a daily basis. But for the sake of ‘recovering’ back the money, I starved myself for 2 weeks and managed to save back the $20 which I should have. That being said, it left quite an impression on me and I learnt an important lesson with just $20.

Back to the topic, when the lender tried to claw back the debt owed, this was what the borrower couple offered, and what all of us should take note.

Give Company Shares To Repay The Debt
The couple proposed to offer some shares of the company to repay some or all of the debt. They would have someone work out the valuation of the company and say that maybe 50% of their company shares is worth $300,000 of the debt they owed, and that based on the forecast the company will do well in the future. This 50% of company shares the lender gets will rise in value.

This is a scam. A private limited company has limited liability. Once it is liquidated, the worst that the company could suffer is to have all its assets sold off. The owner of the company will not have any personal liability. The moment the lender accepts the shares as his repayment, the owner may very well quickly declare the company bankrupt, sold off every asset which then still have to be split 50-50 or according to the proportion of shares each side owns. The $300,000 worth of money cannot be clawed back anymore because the lender has already agreed to transfer the personal liability of the owner to the company, which is already now bankrupt.

One may ask but what if the company is really worth something and has much potential? If that is really so, the owner of the company would not have offered the shares to you. A person who refuses to pay off his own debt will not offer something of a higher value as a repayment. He will only offer something of a much lower value.

This tactic is used by certain Chinese companies in Singapore in the early 2010s, which I am pretty sure happens elsewhere by companies across different countries too. At that time, these Chinese companies would do up all the nice paperwork for listing in the stock exchange, attract investors who would come in to buy the shares using their own money. But these are shell companies who do not have any proper business. Once the funds are raised, it can be used for anything from the purchase of company goods to paying the directors a high salary, much like how I said in my previous article on saving taxes. Once the funds are dried up, the directors will declare the company bankrupt and get delisted. All the investors will suffer and have no way to get back their money.

On a more modern example – the crypto financing companies in which you put your crypto with them to earn interests. You would have realised by now that when the company goes bust, the owners usually goes away scot-free.

Exchange Company Goods To Repay The Debt
This was not offered to my friend, but some borrowers ask the lender to take their physical inventory to nett off the debt. This should only be used as a very last resort if all else fails. For example, we assume that the borrower is selling mechanical keyboards, and he tells the lender that each of these mechanical keyboard sells for $200 on the market, which of course can be verified easily. There are 2 ways to go about it now, depending on how gullible the lender is and how good the borrower is at convincing.

  1. The borrower tells the lender that since each keyboard is worth $200, he will pay back 1500 mechanical keyboards, worth a total of 1500 x 200 = $300,000, which is the amount owed.
  2. The borrower tells the lender that he will give it at a lower price of $150 and pay the borrower 2000 mechanical keyboards to nett off the debt. The lender could then sell the keyboards at $200 and earn a profit of $100,000 at the end.

For both options, the borrower definitely earns money out of it. Chances are his mechanical keyboards are worth a certain amount below the lowest price of $150 he offers. If the lender is gullible and takes option 1, the borrower successfully turns his debt into a sales worth a full $300,000. Instead of oweing money, he now makes a profit and the lender takes the keyboards at market price, effectively becoming his customer. The borrower will have a hard time reselling them at market price, and even if he manages to do so, he will waste a lot of energy, effort and takes up unnecessary risk just to get back the money that is his.

If the lender takes the second option, there is a chance he could earn back some money. But chances are he will also have a hard time doing so. Selling things is not as easy as what people think, especially if one is not in this line in the first place. Similarly, he will have wasted a lot of energy and time just to be the downline of the borrower, who in essence just sits back and relaxes while he bulk sell to the lender. In the rare chance that the lender successfully makes the sales and actually earns some money, there might even be the chance that the lender wishes to continue taking in more mechanical keyboards and reselling them, to the benefit of the borrower. This will be a case of being betrayed but still being thankful to the liar.

The moment the lender agrees to use physical inventory to nett off the debt, the borrower wins by closing a bulk sales contract. The only difference is whether he earns more or less.

Using Your Money As Capital To Earn Interests
This is more unlikely to happen blatantly, but has happened in other forms as well. Supposed the borrower takes the $300,000 and put it in a safe fixed deposit savings, earning interests from his deposits but never intending to pay back any interest to the lender. As of 1 to 2 years ago, the fixed deposit savings in China went as far up as above 4% while the rest of the countries around the world were sinking in near 0 interest rates. As of now we have seen rising interest rates all around the world.

Now the borrower takes $300,000 and puts it in fixed deposit paying a 4% interest per year, earning himself $12,000 in interests. One year later the lender asks for his money back as agreed. However the borrower plays the delay tactic as it is with all the examples above, dragging it to 6 months or even a year later. During this time, he is still earning interests on the lender’s money, but at the end of it the lender most likely will give up and say as long as the borrower can repay the $300,000, he will not ask for any interests. After much effort and trouble, the lender now gets back his money with relief and proceeds to cut off contact with the borrower. The borrower proceeds to find the next target. Should the borrower put up an Oscar worthy performance, both the lender and borrower could still even be friends after that.

Now one may think this example is rare, but in another form it is extremely common. How many of us face delayed salary payment by our employers? This is especially common in small and medium enterprises (SMEs). Many SMEs owe their workers salaries from a range of a few days to a few months. Maybe you are supposed to get your salary on the last day of every month, but it always lapse to the first week of the next. Maybe you did not collect your salary for the past 3 months, but your employer tells you that times are bad, but if you stay on to work, one day he will pay you back everything once things turn for the better. Due to the failing economy and the tough labour market, you dare not leave your job easily, opting to believe him. In the end perhaps everyone gets their salary. But the boss does that to 10, 20 or even 100 or 200 workers depending on the size of the organisation, using the workers’ hard-earned money to put in certain risk-free plans to earn the extra interests. As an exemplary boss who puts his workers above himself, he finally managed to pay everyone their salary after much struggle – half a year later, much to the gratitude and appreciation of the staff, all of whom vowed to give their all for this boss who cares for them.

In certain countries, the agency in charge of giving handouts also do that. Perhaps they have 100,000 people in their area, and the amount of money to be disbursed has been transferred by the central government. However the agency in charge of the area repeatedly find excuses to delay the disbursement, such as intentionally making the administrative paperwork tedious or simply feign ignorance till the recipients demand for it. After many months of delay, some residents finally get their share of the payout. But with such a big number of people and an even bigger amount of money, the agency has successfully earned for itself a fair sum of money using other people’s money.

Scammers are smart. Many times they do not do things in a straightforward manner, but disguise it under other forms. If one is not alert enough, it is easy to fall prey to the scam and still not know about it. Should one day you decide to lend money to others, and has a hard time getting back, do remember today’s article and not to fall in any of their scams. Of course, I am not saying that 100% of all people who have difficulty repaying their money or paying salaries are scammers. There definitely are honest people around in difficulties, but the world is much darker than what we would like to think.

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