Usury is bad business. Usury is good business.

June 15, 2018 § 12 Comments

It is worth emphasizing that personal guarantees on invested capital (usury) are indeed very bad business in entrepreneurship, where capital and labor/expertise come together to produce objectively valuable goods and services. Personal guarantees are a huge red flag that the contracts and capital structure are dysfunctional and should be re-worked before a deal is inked, or that perhaps the deal is no good at all on any terms. It is a naive and foolish business practice to give capital to a business partner under a regime of personal guarantees.

Usury is great business though when the objective is to sell things to consumers (e.g. college degrees in grievance studies fueled by five dollar lattes); things that they cannot afford without selling themselves into slavery, at prices massively inflated by the ready availability of usurious loans.

§ 12 Responses to Usury is bad business. Usury is good business.

  • Rhetocrates says:

    I’d say rather that usury in the consumer case is good business right until it’s not, because the market collapses due to too much unreality.

    But you’re right to say that simply might not happen to you at all until after you’re dead.

  • Zippy says:

    Rhetocrates:

    Put differently usury is – like any Ponzi scheme or other scam – “good” (that is, monetarily profitable) business for those who profit while they profit, but terrible for the common good in the long run.

    And yes, sometimes scammers and cheats get bitten when reality catches up to them.

  • Rhetocrates says:

    Soundbite edition:

    Usury is Amway finance.

  • fontesmustgo says:

    You’re cutting a corner here: personal guarantees are fine. Personal guarantees to pay interest are not.

  • Zippy says:

    fontesmustgo:

    In the OP, because of the specific point I was making, the phrase I used was “personal guarantees on invested capital”. “Invested capital” carries with it the intrinsic implication of financial self interest on the part of the investor. No mutuum made out of financial self interest on the part of the lender is ever morally licit.

    As always prose carries some ambiguities; but it may be that cutting context in the proposed criticism did more damage to meaning than did any corner cutting in the phrasing of the OP.

  • fontesmustgo says:

    Z:

    There is nothing illicit about the sole shareholder of XYZ Corp. personally guaranteeing the principal amount invested in a XYZ Corp. bond. This probably does not happen often in the case of sophisticated corporate transactions, but it’s not hard to imagine giving your sister a personal guarantee of the principal amount of the invested capital she places in XYZ Corp, which you are building from scratch in your garage.

  • Zippy says:

    fontesmustgo:

    it’s not hard to imagine giving your sister a personal guarantee of the principal amount of the invested capital she places in XYZ Corp, which you are building from scratch in your garage.

    In that scenario the sister is not a capital investor. She is a sister making a mutuum loan to her brother, with no intention of profiting from the loan herself. The loan is not “invested capital” to her, at least the way I am using the terms.

    It is also, independent of whether there is any pursuit of profit on her part, a huge red flag that she can’t really afford to lend him the money. If she could she would be his business partner under some sane capital structure, not a mutuum lender.

    In general, mutuum lending for a business purpose is like flirting with your secretary: even when it isn’t technically usurious it is almost always one or both of immoral or really stupid.

  • fontesmustgo says:

    She’s a capital investor. She’s supplying capital directly to XYZ Corp. (the check she writes is made out to XYZ Corp., and title never passes through her brother). She is entitled to a share of the profits of XYZ Corp., should there be any, and she wants these profits. She is motivated by them.

    But because her brother loves his sister and suspects that any failure of XYZ will be his fault, he personally guarantees his sister’s direct capital investment in XYZ Corp. He doesn’t personally guarantee a return on her investment, but he does guarantee repayment of principal.

    Anyway, I don’t want to distract further from the usury discussion (especially with an uncommon scenario) so after this I’m done. My only point is that there is nothing per se illicit about a personal guarantee. The relevant question is: what is being guaranteed? If it’s principal, there is no usury.

  • Zippy says:

    fontesmustgo:

    But because her brother loves his sister and suspects that any failure of XYZ will be his fault, he personally guarantees his sister’s direct capital investment in XYZ Corp.

    This kind of contract has been condemned by the Magisterium. See here:

    https://zippycatholic.wordpress.com/2017/06/12/recourse-to-the-magisterium/

  • ProtegeAA says:

    The “personal guarantee” Ray Kroc gave the McDonald’s brothers is a great example why I run, not walk, from anything not put in writing in a contract.

  • MMPeregrine says:

    Here is one personal guarantee that we can count on –

    “And I say to thee, thou art Peter, and upon this rock I will build my Church, and the gates of hell shall not prevail against it” (Mt 16:18).

    From the gospel on the feast of St Peter and Paul.

    Zippy, I thank you because reading your blog has helped me in many ways, but none more so than helping to strengthen my faith in the above promise given by our Lord to St. Peter.

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