Investors

[HJY]

Hello,

I read some posts here that mention looking for investors for funding of a project. These investors can be anyone from family and friends to people who are just looking for opportunities to invest. They are also separate from banks.

My questions are:

1. What sort of deals do you make with these investors so they get their money back?

2. Do they become partial owners of your business?

Thank you,
Jamie

[HJY]

Hello,

Well I read some more on this subject on a small business website. The answers to both seem to be it depends upon the investor. According to the site some investors want to have an active role within your business, while others just want a good return on their investment within 7 years.

Hope this helps others.

Cheers
Jamie

[crassbrauer]

I have no experience with this, but a friend of mine who does once told me that regardless of the investors' percentage of ownership that you should word the contract so that you alone ultimately remain in control of the business.

[mach5]

I'll write a little bit about this as I am familiar with negotiating with private investors for my real estate biz. Basically, what we like to do is structure interest only notes with the principal due after a year or two depending on our needs. These notes are just simply loans and give the holder no stake in the business, its as if they are acting like our bank and just giving us a loan. Since it is private you'll have quite a bit of bargaining room, and you can close the deal at your attourney's office. This is probably the least risky for the investor as they will have something solid on paper if the loan is defaulted, however, more risky for the borrower because you will have interest payments and you'll be on the hook for the balance after the term is up.

We'll haggle over the interest rates with them such that the investor will be making more than money market accounts but it will be competitive for us as opposed to going to a bank. A good starting point is 7-8%. If you are just starting out, I suggest you make the repayment terms 3-4 years minimum. Usually, if you go to a bank after 3 years in business you can borrow unsecured money at about 20-25% of your gross annual sales fairly easily, so you could use that as a source to repay the principal to the investor to keep them happy.

If your investor is a little uneasy about loaning out unsecured then try to secure it on the building and/or equipment. A bank will probably only loan out to about 75% max, but you might be able to convince an investor to loan out the remaining 25% as security. The investor would get a mortgage recorded on the property, second to the bank's or principal lender's mortgage.

Now, if you want to give your investor a stake in the business, as a silent partner or not, you can do that, however it is more risky for them because if you go under, then they loose their money. However, some investors like this route because the payoff is higher, so if they believe in your business model you can give them stock or a certain stake in the company as their payoff in the end. A silent partner is just a money-man, they are not allowed to make decissions in the day-to-day operations of the business, but they may have the right to make certain decisions on a higher level, like bringing in other partners, dissolution, etc.

Hope this helped.

[pennbrew2]

...interest only notes with the principal due after a year or two depending on our needs. These notes are just simply loans and give the holder no stake in the business, its as if they are acting like our bank and just giving us a loan. We'll haggle over the interest rates with them such that the investor will be making more than money market accounts but it will be competitive for us as opposed to going to a bank. A good starting point is 7-8%.

I've never heard of a private lender willing to do an unsecured loan to a start-up business at 7-8%. Where do you find such people??

Of course someone also posted once that banks will freely hand at loans with barely a glance at the business plan.

Maybe I just don't know the right people...

---Guy

[ravinghophead]

I'm currently doing a project similar to this and if i can recommend a book it would be 'New Venture Creation' by Jeffrey A. Timmons. Published by McGraw-Hill the ISBN no. is 0-07-116790. There are whole chapters in there about this exact subject including the lowdown on what type of investors to look for and how to negotiate. It can be a bit jargoney at times but that's the way the cookie crumbles I'm afraid.

[mach5]

I've never heard of a private lender willing to do an unsecured loan to a start-up business at 7-8%. Where do you find such people??

Of course someone also posted once that banks will freely hand at loans with barely a glance at the business plan.

Maybe I just don't know the right people...

---Guy

It's not about knowing people it is just about knowing what questions to ask. I have done it a couple of times without giving a business plan, but that is for an RE business not a brewery/restarurant. The lending scene may vary from industry to industry. Also, I think I did mention that they want to see you have 3+ years under your belt, so, no, this isn't for startup necessarily.

Basically, we'll walk into any large regional or nationwide bank and ask for a business line of credit for working capital. They will typically loan out 20-25% (up to $50k) of your gross annual sales at a rate of anywhere from prime on up and the rate you get depends your personal credit score and you (as owner) will have to personally guarantee the loan. We've been getting prime + 1%, unsecured.

You might want to try Citizen's bank, Wachovia, or Wells Fargo if they are local to you. Check out their websites and fill out the on-line app and they will contact you back within a day or two to do the formal app. We have been successful with all three of those banks.

Now, as far as private money is concerned...yes, it does take a few contacts to find these people and once you find them you cannot be afraid to just ask them for money, even if they don't know you that well. The worst thing they can say is...no...ooh, scary. Start by asking the professionals you work with, accountants and lawyers are good because often they work with a lot of people that have disposable money. Also, don't be afraid to talk to friends and family, a deal structured properly will be beneficial to everyone and if it executed well should keep the status quo with relationships.