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I agree with Harry. Without going into the specifics about the loan/note, recordation of it, business structure, etc... WHY NOW? I would make it a requirement that they cease the start up business until the close of the transaction or refer them to another broker who would want the headaches. Remember, the investor is taking a short on payoff. If the borrower has access to large sums of money with the plans of starting a business, they may not appear to be that much in distress. If you owe me money and I see you getting a loan from a family member to do something else rather than pay me, I might be just a little upset and not take you too seriously.
James - If they want to start the process now, then so be it. It sounds like their situation is going to bring forth a request for a cash contribution and prom note from BOFA/Guaranty anyway, with a solvent business. Whether it's in three months or six months, the picture probably won't change much. I'd say if they are willing to be realistic about the potential to be asked to "share in the loss", then do it now.
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