What
are all the ways to get investment into your small business?
A comment from a YouTube viewer asked me
to summarize all the ways you can get investments into a small business.
Big Task!
But, by considering it systematically, we
can examine the different possibilities of how funds from an investor can enter
a business to fund the things an owner needs.
Have you ever wanted to own a mini-storage warehouse business? I have. All the pleasures of collecting rent with none of the hassles of toilets and other inconveniences.
Check out this story of the time I tried to build one with some partners. It ended in a loss!
As
you know, I recently asked people, ‘If you were sitting down for a cup of coffee
with me and could ask just one question, what would be?’ I'm going to tell you, I was totally blown
away that the kinds of questions that I’ve gotten. I would never in a million years
have dreamed them up myself. Thank you
for everyone who has submitted one and don't be afraid if you didn't to send
one in.
I'm
going to answer one of the wackier ones and answer it for us here today. Bill asks, ‘How do I find and convince
investors to invest between 1.5 and $2 million on a large rental complex such
as 150 units in Florida with up to $1 million in renovations and have me manage
it?’
I
spent the last couple of days thinking about this. I'm going to take a stab at it and just so
that we’re absolutely clear, I have never done this before. I have, however, pooled investors together
before for a mini-storage project. So I am going to draw a lot on those
experiences that I had in that project and try to figure out a way that we can
do this deal.
Let’s
assume that this project, including renovations, is going to be a $5 million
dollar deal. The very first thing we have to do is figure out what kind of
leverage are we going to be able to apply here.
Leverage is borrowing, borrowed money is cheaper money usually than
equity, because investors want a big return on their money.
People
don't want to take a risk to get 3% back, but a bank with a security interest
against the building they might be very happy with 3%. If you’re going to put a
whole lot of investors together there probably are not going to be any
particular investors that are going to be willing to stick their neck out and
be liable on the mortgage. You probably don't want that either.
So
our question about leverage is going to have to be something like this; You’re
going to have to call banks that service that area of Florida and you’re going
to have to say ‘Hello, this is Bill. I represent a group of investors from
Canada and we want to buy a $5 million building down there. We’re wondering
what sort of loan-to-value you are willing to consider with no personal
guarantees strictly the lien on the property.’
Now,
I asked that question of a banker that I know here in Canada before, and without
batting an eye he said 50%. So as long as they know the building is worth $
million, let's assume that a bank that operates in Florida is going to be
willing to lend $2.5 million on that.
We’re
halfway there, okay. Now where is the other $2.5 million going to come from? This
is going to have to come from investors. This is going to have to be equity. So
how are we going to structure this?
Different
people are going to be in different situations, your investors may have
different tax rates, tax brackets, etc. different earnings from other sources.
Because
the investors have such different interests with respect to taxation and
income, the limited partnership is a great tool to use.
The
features of a limited partnership is that one partner has unlimited liability
and then the limited partners, they’re protected just like being shareholders in
a corporation. They’re limited, they’re liabilities is limited to the money
that they put in.
So
let's call this building limited partnership Bill LP. Let's assume that you're here where I am in
New Brunswick. So it is going to be New Brunswick limited partnership.
Within
Bill’s limited partnership we have to have a general partner. Bill may probably
say it should be him, but it shouldn’t. The
general partner, the one who faces liability, don't forget it can be any legal
person. So what we want to use is a corporation.
Bill
will want to create a management company or a investment management company and
we are going to call that Bill Co Inc. Bill Co Inc is going to be our general
partner and that then leaves room for the limited partners.
The
limited partners are going to be the one’s supplying the money and having them
be limited partners is great because of the features it provides to them. Number
one, if they put in 10 grand and Bill messes things up and the bank wants to
sue you down in Florida and tax people are after you or whatever, they can’t be
pursued.
They
were limited to the money they put in. Number two, in a partnership, earnings
flow through. Partnerships don't
actually pay any tax. Every individual partner in the partnership has to
declare their own tax form for their percentage of the partnership.
So
if somebody owned 10% of this whole partnership arrangement and there was
$100,000 in cash flow for one year, they would actually declare $10,000 of that
cash flow on their own tax return. What's nice about this is that if there are
people like retired folks who have very low incomes, they might personally want
to be limited partners because they have a lower income tax bracket themselves.
On
the other hand, big wheel multimillionaire investor types, they’re going to have
family trusts or corporations or something set up to do their investing for tax
reasons. They're going to make those
entities be the limited partners for their interests.
Basically
what you're saying is, ‘give me your money, here's what I think I'm going to do
for a cash flow for you and you get to manage your tax consequences to your
best advantage with your own advisors in the best way that you can.’
Next
what you typically have is a partnership agreement, which outlines the details
of how the limited partners are going to interact with the general partner, Bill
Co Inc.
So
your agreement is going to say that Bill Co Inc. is going to manage the
property and the limited partners are going to supply the capital. Bill might want to determine an equity split
here. Bill is taking the time to put
this whole thing together, dealing with the bank, etc.
Bill
will be running all over the countryside talking to investors. So Bill should
get something out of this, right? Maybe he decides that he’s going to own 20%
of the building and that's going to be his fee for putting all this stuff
together. We can now say that the general partner owns 20% of the equity, and the
limited partners own 80%.
Bill
can sell the limited partnership portions as ‘units’ of $1,000 or $10,000,
whatever he thinks will work best for him.
Next
the property will have to be identified and put under contract. There needs to be enough time for Bill to
gather his investors together and show them his figures for this property.
There
are a lot of moving parts to a deal like this… the building, the investors, the
paperwork. Bill will have to put
together a document outlining all this information and the projected cash flows
and appreciation in order to convince his investors.
Limited
partnership interest is considered personal property which means that a person
who owns one of these units can give it to their heirs, they can sell it, they
can treat it just like you would a couch.
Some people are going to ask, ‘How
do I get my money back?’ If you tell them, ‘You’re never going to get your money
back. It's going to cash flow forever, and you’re going to give it to your kids’,
some people may not like that.
So
what most of the limited partnerships in the world of equipment leasing or in
the private mortgage community do is that they actually have a time horizon for
the investment.
What
they say is ‘we’re going to amortize the bank loan over 20 years. Let's say you
put up your 10,000 or $1000 today and in 20 years when that loan is finally
paid off the building will go up for sale and we will sell it and divide out
the money according to the equity.’
20%
goes Bill Co. (as the general partner) and the rest is divided up amongst the
limited partners based on their ownership percentage just like the profit every
year from this thing is divided up amongst the partners.
That
way if you go to someone who's 30 years old for example, they’re going to know
that when they’re 50, if everything works well that this whole thing will come
back. They’ll get a whole pile of money back out of this deal.
Anyway,
great question Bill and I’ve got to tell you in this list there is a bunch more
just like it. So stay tuned everyone there’s more to come.
I came across this article recently, it provides a great rundown of funding sources for startups. I guess local investors would fall into the Angel or Venture Capitalist categories.
One of the categories that I found interesting was to fund a business with a 'side business.' There is one example given of a person who does work as a hiking guide to get money to invest in his online business.
The 'winning a contest' segment was also an eye-opener. If I think about it though, I can remember a lot of innovation based contests where people won from $10,000 to $100,000. I would imagine though that this money is not 'free.' it can take a lot of effort to put these presentations together.
Enjoy
15 Creative Financing Methods for Startups
Katherine Arline, Business News Daily Contributor | May 04, 2015 02:43pm ET
For many would-be business owners, financing is one of the most intimidating and challenging parts of the startup process. Some entrepreneurs may not have the cash they need on hand when they want to launch, and bank loans or investments can be difficult for brand-new small businesses to obtain.
If you can't bootstrap your business, there is a wide variety of both traditional and innovative funding sources you can draw from to help you get started. Whether your goal is to open a local boutique or to launch a tech startup, one of these options is likely to be the perfect fit for your next business.
Small Business Administration loan. The Small Business Administration (SBA) offers two types of loans that can help entrepreneurs get the capital they need to start their business: the 7(a) guarantee small business loan and the 504 fixed-asset small business finance program. The 7(a) guarantee loans are more common for small businesses. Prospective borrowers can apply for these loans at banks that participate in the SBA loan process. But this may not be the right choice for you if you don't have a proven track record. Chuck Evans, co-founder of Prudent Lenders LLC, noted that the SBA typically looks for applicants who are two years into the business cycle and generating cash flow. [CONTINUE TO MAIN ARTICLE]
