Author Topic: Should I make this investment?  (Read 2611 times)

tealduck

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Should I make this investment?
« on: November 09, 2016, 02:21:00 PM »
Hello Mustache Nation. Iím looking at investing (loaning $125K at 10% interest) in a small business in a growth phase.  I donít necessarily want to join as an equity partner, Iím just looking for interest income, and the business owner would prefer to continue as the sole owner of company.  So, it seems debt financing will make sense for both participants.  However, if I invest $125K Iím concerned that debt servicing may pinch his cash flow for 12-15 months and restrict growth which wouldnít be good for either of us.  That said, if Iíd still want to go forward with this investment what debt financing approaches might I offer him, bullet loan? 

BigHaus89

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Re: Should I make this investment?
« Reply #1 on: November 10, 2016, 12:29:10 PM »
You will definitely need to get a contract written up for this. What happens if the biz owner defaults on the loan? What happens if they pay late? What is the debt to income ratio? Just some things to consider when writing up the loan contract. I personally think things like this are great diversification(investing locally) and sometimes have a better ROI than stock markets.

JAYSLOL

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Re: Should I make this investment?
« Reply #2 on: November 10, 2016, 01:10:45 PM »
Hello Mustache Nation. Iím looking at investing (loaning $125K at 10% interest) in a small business in a growth phase.  I donít necessarily want to join as an equity partner, Iím just looking for interest income, and the business owner would prefer to continue as the sole owner of company.  So, it seems debt financing will make sense for both participants.  However, if I invest $125K Iím concerned that debt servicing may pinch his cash flow for 12-15 months and restrict growth which wouldnít be good for either of us.  That said, if Iíd still want to go forward with this investment what debt financing approaches might I offer him, bullet loan? 

Maybe posting more details about type and size of business, target market, the businesses plan for the money etc.  How big of a chunk of your stash is $125K?  I wouldn't lend out my life savings all to one place unless i had a high risk tolerance and knew the business extremely well. 

tealduck

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Re: Should I make this investment?
« Reply #3 on: November 10, 2016, 02:53:11 PM »
JAYSLOL...thanks for the comments.  The 125K will be 10% of my stash.  I meet with the owner next week and will get into many of the financial details and business plan.  Also, meet with attorney who could draw up the documents.  If all makes sense I'd feel comfortable with this figure of 125K but need to know more about the business.  I've owned a couple businesses and those have worked well in each case i had a partner.  But, being the banker and just providing the cash and waiting for interest income i'm unfamiliar with. And offhand don't know the best way to structure payments if again that cash flow is pinched for approximately 1 year.  I'll let you know how this plays out. 

BigHaus89...thanks for your input as well.  You nailed it part of the reason for doing this would be investing into a local business which would help me diversify.

soccerluvof4

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Re: Should I make this investment?
« Reply #4 on: November 10, 2016, 03:12:18 PM »
Colateral?

JAYSLOL

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Re: Should I make this investment?
« Reply #5 on: November 10, 2016, 05:50:59 PM »
JAYSLOL...thanks for the comments.  The 125K will be 10% of my stash.  I meet with the owner next week and will get into many of the financial details and business plan.  Also, meet with attorney who could draw up the documents.  If all makes sense I'd feel comfortable with this figure of 125K but need to know more about the business.  I've owned a couple businesses and those have worked well in each case i had a partner.  But, being the banker and just providing the cash and waiting for interest income i'm unfamiliar with. And offhand don't know the best way to structure payments if again that cash flow is pinched for approximately 1 year.  I'll let you know how this plays out. 

BigHaus89...thanks for your input as well.  You nailed it part of the reason for doing this would be investing into a local business which would help me diversify.

Sounds like you are playing this pretty smart and have some experience to back it up, and at 10% it's not a big gamble for you either.  Interesting, hope this works out for you.

Davids

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Re: Should I make this investment?
« Reply #6 on: November 11, 2016, 12:54:17 PM »
10% interest, not bad. Hope it works out!!!

specialkayme

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Re: Should I make this investment?
« Reply #7 on: November 11, 2016, 01:37:52 PM »
I think it will depend alot on what the business can afford, but I'd probably look at doing something like a 15 year amortization with a 5 year balloon payment. That should provide you sufficient protection, while not constraining too much of the company's cash flow. You could always extend the balloon in the future, if you want to, or do a loan modification agreement and reduce it to interest only for a period of time, if it looks like cash flow would be constrained.

I'd also make sure you have sufficient collateral.

triangle

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Re: Should I make this investment?
« Reply #8 on: November 11, 2016, 08:46:08 PM »
From a pure risk perspective if you are looking for high income stream you would be better off investing in a BDC (business development company) which typically invests in a portfolio of small/medium businesses that need financing.  Instead of a single company, especially if this is your friend or families small business. I am not trying to get into your motivations and I am sure you are well aware of the risks, just saying that from where I sit I would think long and hard and understand the exit game in case there is a failure in the business and it gets liquidated or sold, as well as all the positive outcomes.

I am not specifically recommending BDCs or this company over any other choice but as an example ARCC (http://finance.yahoo.com/quote/arcc/) pays out at nearly 10%, with some other BDCs paying more or less.  I find that BDCs are hard to analyze and understand and have volatile stock prices but IMO that would be a safer way to try and make a 10% return, while gaining liquidity and potential for some upside as well as downside.

Mighty-Dollar

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Re: Should I make this investment?
« Reply #9 on: November 16, 2016, 04:25:51 PM »
investing (loaning $125K at 10% interest) in a small business
Private equity is the fastest, easiest way to lose 100% of your money. http://www.investingadvicewatchdog.com/private-equity.html