Hey everyone,
I remember a few years ago I had an interesting exchange with a viewer about a potential investment scenario that I believe could benefit many of you. Let's dive into it!
The Situation:
A viewer on the West Coast shared a unique opportunity. A friend is launching a startup, armed with a solid business plan and approval for a loan from a bank. The catch? The friend needs a certain amount of cash as equity to secure the loan.
Option A: Invest the Money
The startup entrepreneur approached the viewer with two options:
Loan $15,00 or-
Invest $15,000 in the business.
The Dilemma:
The viewer sought advice on the pros and cons of each option and how to secure returns.
Why I'm Not a Fan of Being a Minority Shareholder:
Business owners can manage finances in a way that leaves no net income for dividends, leaving minority shareholders with little return on investment.
The only way this might work is if the shares had some kind of defined preferred rate of return and without collateral, these are still risky.
Option B: Lend the Money:
Considerations:
Collateral: Does the entrepreneur have any collateral to secure the loan?
Interest Rate: Without collateral, think of yourself as a credit card. Be cautious and consider a higher interest rate.
My Advice on Interest Rates when putting your money into these kinds of deals:
For secured loans: Prime plus a few points.
For unsecured loans: Consider the risk and go for higher rates, similar to credit card rates.
Risk Mitigation: If possible, secure collateral for a Plan B in case the business doesn't succeed.
A Personal Touch: For more significant amounts, consider involving multiple investors to share the risk and responsibility.
Investing or lending to startups involves risk, and understanding your position is crucial.
Remember, the success of a startup depends on various factors, and having a backup plan is wise.
If you’d like to watch the video I made about this or download a 10 step checklist here:
Don’t forget to like the video!
Those old ones need more love.
Cheers! 🥂
David Barnett
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