» Topic: Private lending to small businesses.Bonner & Partners

Sunday, 21 January 2018

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Private lending to small businesses.

Welcome! Forums Real Estate and Private Investments Private lending to small businesses.

This topic contains 4 replies, has 3 voices, and was last updated by  Chris Lowe, Editor-at-Large 4 years, 6 months ago.

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    ANITA K.

    What are things to be aware of when lending to private businesses?



    Like all lending, it comes down to cash flow and the security for the loan. Do you have a personal guarantee? Is the collateral sufficient? Does the cash flow warrant the proposed prepayment? Assume the worst and pray for the best.

    Follow your nose, use common sense, and you’ll likely be fine. One very quick way to find out the questions you should ask is look for a business loan from a bank yourself. They’ll provide you with an invaluable education and, more than likely, a disdain for bankers….


    ANITA K.

    What is the difference between an investment in a business and a loan to a business?
    How does one avoid running afoul of lending statutes that limit profit on a loan while seeking a high yield on investment income?


    RITA H.

    If I understand your question correctly, I would answer it thus: The difference between investing in a private business, or loaning money to it would compare to either buying shares/preferred shares in a public company or buying its bonds. only it would be riskier as you might not have the transparency of a public company. I would think that a loan (corporate bond) to such private company would generate interest/income so there should not be legal problems providing it is all reported to IRS. To simplify: A profit or loss would result if you made a direct investment (shares). As Joey above mentioned, in either case, you would need the comfort of security. The business owner would/should be able to tell you if your loan could actually increase your capital position or your contract would lay out what you can expect. This sounds like a sophisticated case that should be discussed with a good accountant who could tell you whether such loan had the chance of increasing in value (profit) as well as giving you a yield.
    If you do not understand something – best to stay away.


    ANITA K.

    Assume you are approached by a friend or relative. Their business needs cash to make payroll taxes, they are willing to pay 15% if you put $10,000 in their account for 3 months, they ask you to invest in their business. They have collateral but need cash for a short term. You get your principal and interest back in full. You report this to the IRS as loan interest?? Investment returns?? Are you violating lending laws by making 60% on an annualized basis? Is there a way to define an investment with high return vs a loan to a non-public, non-stock issuing company? If they were a public company they could issue stock or bonds and buy them back or call them. What can a private company do to raise cash?

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