Investing in an SME business?

nice_guy80

I posted this on another forum but didn't any responses

I have discussed with a local business about investing in their business as they wish to expand to a new premises and buy new equipment. It was actually on my suggestion, not theirs.

I have never done anything like this before.
It will be capital investment, repayable over a set term.

How do I go about it?
what are the implications for me?

Alan Shore

If you a lending them money you need to sort out an agreement.

What's is the rate of interest and the term. Are you taking a charge over the assets in case of default. Are you getting a personal guarantee from the directors in case of default.

Why are they not getting the money from the bank?

Can you afford to lose the money if it does not work out. Will the rate of interst compensate you for the risk of lending to an SME.

Is there a better use that you could put the money to?

You will pay marginal rate tax, PRSI &USC on the interest and there is a 20% withholding tax obligation on the payer.

I think the previous poster has assumed your offering a loan, but your not a financial institution.

First thing to establish is how long your willing to wait to get your money back.

So look at the net profit of the company after tax, then establish a realistic period of time when you'll get your investment back and tie that to the equity your gong to take in the company.

EG: Business is making 100K a year net profit so is worth roughly 400K, your investing 200K, take 50% of the company and a 2 year payback, then profits are split moving forward.

You make an agreement with the owner either to have a payback period in the form of a dividend, or work out a royalty figure off each sale that will get your your initial investment back.

The financial return is usually two fold in the agreement, or at least would be if I was doing it. First is how long it takes you to get your initial investment back, and second is the profit split moving forward. Dont be soft in terms of payback period, getting your money out, and clear detailed clauses on profit splits and returns after the initial investment has been put in. Otherwise you'll end up arguing how much to reinvest in the company out of the yearly net profits.

skelligs

At present there is an EIIS scheme to give tax relieft when you invest in a small business. http://www.revenue.ie/en/tax/it/leaflets/it55.html

Basically, you invest say €100,000 (it can be any amount from €1000), and you get immediate 30% tax relief. That can be taken in the same year, the next year or spread over 3 years.
After 3 years, if the company has added employees, you can claim another 11% tax relief.

So a €100k investment will cost you €59k after tax relief.


However, this scheme is not applicable to loans and there is no official risk free way around it. What can be done is for the company directors to say that a share buy-back will be considered after 3 years, however they would not be permitted to give guarantees.

If you know the company and the people behind it well enough - this would be a very good option. You could also see it as a longer term investment too.

nice_guy80

Thanks for the replies people.

I've been discussing it with the owners of the business.
Basically they are not taking any money from the business yet as they are still buying equipment and do not have a large enough premises to clear a profit.
The loan will be used to move to a bigger premises with a few months rent up front which will allow the owners to turn a bigger profit per hour - its a sports and fitness business.


I was looking at a loan as there would be a set term to get money repaid
A rate would be agreed, with set repayments over the term.
The loan does not equate to a share in the business
Equipment in the business will be used as guarantee (worth more than the loan).
the money is making practically nothing in the bank at the moment so no point in having it there.

nice_guy80

nice_guy80 wrote: »

the money is making practically nothing in the bank at the moment so no point in having it there.

Yes but its not at risk of being lost sitting in the bank, and equipment depreciates in value.
I would ask yourself this question before you give them a loan - would the bank give them a loan if they applied?
For me I would only start giving loans out of I had A LOT of money in the bank, and I was certain a return would be made. And if I lost the money, it would be no big deal.
There is a lot of risk involved in money lending, thats why banks get people to sign personal guarantees even on business loans. Its why they make them invest an equal amount as to the loan they are giving out, and its why there is a lot of paperwork.
Your probably not going to do either of those 3 things, and therefore your risk skyrockets.

professore

This is ringing all sorts of alarm bells for me. Why can't they clear a profit in their existing premises? If they are such good business people they would be making a decent profit in their current premises as they would have done the calculations beforehand.

You would be throwing good money after bad IMO. They will just spend it and then claim inability to pay, and/or declare bankruptcy.

There are plenty of better investments out there.

And Equipment in the business? You will only get a fraction of the supposed value at liquidation.

skelligs

If the EIIS is not a runner there are 2 options.

1 - your buy the new equipment or take ownership of current equipment and lease it to the business. Therefore you officially own the equipment until it is paid off.

2 - Get a bank to lease the equipment and for you to act as guarantor.

nice_guy80

I appreciate the responses

they are making a profit.
The reason they are not taking money is that the lads involved are constantly buying new equipment, which the business owns.
They have both agreed to take very little money out for the first two years (at least). This business is only 7 months old.

The guarantee against equipment is equipment owned wholly by one of the owners of the business.

And the owners are putting their own money into this expansion via equipment purchases.

As I said, I have not made my mind up on anything. We're just discussing things.

pedroeibar1

By looking at your posts and your replies to the various comments it is very clear that you need professional advice.
You have not mentioned a figure, which is the first basic question/answer in a case like this. You fail to define (understand?) ‘the business.’ Is it a company? A partnership? A guy operating as a sole trader with help from a few mates/employees? You contradict yourself in saying the lads involved are constantly buying new equipment, which the business owns. And The guarantee against equipment owned wholly by one of the owners of the business.

If you have friends with a start-up 'business' and they need cash, and you want to do the big fella, lend it to them as individuals, as friends, and not as a business deal. If it is a company, invest in that entity (e.g. preference shares). Giving a guarantee is the same as giving cash. Be prepared to lose your friends or cash or both. The latter is how most of these deals end up.

nice_guy80

pedroeibar1 wrote: »

By looking at your posts and your replies to the various comments it is very clear that you need professional advice.
You have not mentioned a figure, which is the first basic question/answer in a case like this. You fail to define (understand?) ‘the business.’ Is it a company? A partnership? A guy operating as a sole trader with help from a few mates/employees? You contradict yourself in saying the lads involved are constantly buying new equipment, which the business owns. And The guarantee against equipment owned wholly by one of the owners of the business.

If you have friends with a start-up 'business' and they need cash, and you want to do the big fella, lend it to them as individuals, as friends, and not as a business deal. If it is a company, invest in that entity (e.g. preference shares). Giving a guarantee is the same as giving cash. Be prepared to lose your friends or cash or both. The latter is how most of these deals end up.

Fair enough.
It is a limited company. since the company was started it has been buying equipment.
one of the owners of the property brought equipment into the business with him at the start. he owns it outright, that will be used as guarantee
the money involved is €14,000
the lads involved are not friends. They said something to me when I was in the place, I think there is an opportunity for the business to be successful, so I offered them help.
again, I appreciate the advice

Given what you said there as a business person I dont see it as an opportunity at all unless your getting equity in the business. Otherwise its just a big risk for your money especially since these guys are not your friends. You would become essentially a money lender, and if thats the case your going to need to have the ability to collect when and not if they dont pay!

Atomico

nice_guy80 wrote: »

I appreciate the responses

they are making a profit.
The reason they are not taking money is that the lads involved are constantly buying new equipment, which the business owns.
They have both agreed to take very little money out for the first two years (at least). This business is only 7 months old.

The guarantee against equipment is equipment owned wholly by one of the owners of the business.

And the owners are putting their own money into this expansion via equipment purchases.

As I said, I have not made my mind up on anything. We're just discussing things.

I don't get it - what benefit do you get out of this for taking all the risk in lending your money? There is no equity mentioned here at all.

It sounds like a bad idea - 'neither a borrower or a lender be'! You probably can't avoid the former all of the time, but you can avoid the latter most of the time.

skelligs

Atomico wrote: »

I don't get it - what benefit do you get out of this for taking all the risk in lending your money? There is no equity mentioned here at all.

It sounds like a bad idea - 'neither a borrower or a lender be'! You probably can't avoid the former all of the time, but you can avoid the latter most of the time.

As no-one except the OP knows the business, I think it is totally unfair to make any judgement. Some people have an altruistic side and will help other business. Not everything has to have a huge gain.

€14k is not a huge amount of money, but can be of enormous benefit.

Possibly an alternative is to get the company to go for 15k - 20k funding on linkedfinance.com and for you to particpate that way. Therefore its all above board, you get about 6% interest instead of 0.01% at the bank and its paid over 3 years. Formal paperwork is there and proper procedures are in place.

skelligs

skelligs wrote: »

As no-one except the OP knows the business, I think it is totally unfair to make any judgement. Some people have an altruistic side and will help other business. Not everything has to have a huge gain.

With respect mate, he is asking about investing money in a business forum, not the philanthropy forum

Atomico

skelligs wrote: »

As no-one except the OP knows the business, I think it is totally unfair to make any judgement. Some people have an altruistic side and will help other business. Not everything has to have a huge gain.

€14k is not a huge amount of money, but can be of enormous benefit.

Possibly an alternative is to get the company to go for 15k - 20k funding on linkedfinance.com and for you to particpate that way. Therefore its all above board, you get about 6% interest instead of 0.01% at the bank and its paid over 3 years. Formal paperwork is there and proper procedures are in place.

Fairness doesn't enter the equation here at all - all we have to go on is the info the OP has given! Same as on any other thread.

€14k is not a huge amount of money and I'm sure it would be of significant benefit to the owners when they are buying top of the range treadmills or weights. Not so much benefit there for the OP, from what I can gather.

I'm 100% in favour of altruism but as El Rifle mentions, I doubt the OP would be posting on here if he was looking to be altruistic specifically. If you are looking for no gain, give to a registered charity instead of the boys down the gym who are themselves in it for profit and not for charity.

pedroeibar1

Bluntly, this thread is descending into BS. The OP has no idea of what is involved in a business borrowing/investment project and needs professional advice. Some of what has been posted already is BS.
He is not a shareholder, he does not a family member, he is just a customer looking for an opportunity to park some money and get a rate of return. Were he, as proposed, to lend 14k cash to the gym people what is to prevent them from refusing to repay and claim that he was an illegal moneylender (if his rate was high?) If they do not pay up is he aware of the laws involving debt collection? Of the penalties for illegal moneylending?
Suggestions other than ‘go talk to an expert’ are unhelpful. OP, you need professional advice, go away and get it.

nice_guy80

I have been offered 15% return on the money after 2.5 years, for providing capital and helping the lads out developing the business via promotional stuff.
It is only at the preliminary stages of discussion, so don't get so agro.

Where would you consider going for professional advice?

pedroeibar1

No aggro, just your posts are not about entrepreneurship or management, they are not even business 101 because they ignore /have ignored so many business basics that have an impact on your topic. The manner in which you dribble out information on prompts shows that you have no idea.

You are getting into seed capital, you now mention lending the money at 6% p.a. which is far, far below what that type of investor would be charging for a non-equity involvement. Any bank would charge borrowers from that size/type of established business at least that rate. Your risk is considerably higher, you have ignored the time value of your money in a highly illiquid investment and have not factored in the risk of not getting your money back.

On top of that you now announce you are going to ‘help’ develop the business (no fee mentioned) so there is a good case to be made that you, developing the business and with a 14k investment, are a shadow director with all that entails should the business fail.

Either the guys talking to you are deliberately trying to take you to the cleaners, or they are so clueless of the subject they will not be around to give you back your money. Either way I'd run a mile.
Go talk to a solicitor or an accountant and save yourself 14k.

nice_guy80

Again, thanks for the reply.

skelligs

Deleted User wrote: »

With respect mate, he is asking about investing money in a business forum, not the philanthropy forum

Atomico wrote: »

Fairness doesn't enter the equation here at all - all we have to go on is the info the OP has given! Same as on any other thread.

€14k is not a huge amount of money and I'm sure it would be of significant benefit to the owners when they are buying top of the range treadmills or weights. Not so much benefit there for the OP, from what I can gather.

I'm 100% in favour of altruism but as El Rifle mentions, I doubt the OP would be posting on here if he was looking to be altruistic specifically. If you are looking for no gain, give to a registered charity instead of the boys down the gym who are themselves in it for profit and not for charity.

jeez - does anyone actually read posts these days?

I can see why people don't bother posting here anymore.

I'm not saying to give the loan for free, but some posters here seem to think the OP has to nget a huge return. No-one here knows anything about the business that the OP is looking at and therefore they CANNOT give informed comment.

The OP asked how he goes about to and what implications. I think I'm the only one that has given 4 options regarding how to go about it and others just want to bash the OP for evenb daring to ask for information.

Christ - this USED to be a good thread.

skelligs

skelligs wrote: »

jeez - does anyone actually read posts these days?

I can see why people don't bother posting here anymore.

I'm not saying to give the loan for free, but some posters here seem to think the OP has to nget a huge return. No-one here knows anything about the business that the OP is looking at and therefore they CANNOT give informed comment.

The OP asked how he goes about to and what implications. I think I'm the only one that has given 4 options regarding how to go about it and others just want to bash the OP for evenb daring to ask for information.

Christ - this USED to be a good thread.

The only thing you have demonstrated here is that your very naive when it comes to business.
He has asked how to go about investing in a business and been given sound advice about the high risk of it.
If he wants to go ahead despite the high risk thats up to him. But lets not pretend it is anything other then high risk, and talk nonsense about altruism.

pedroeibar1

Poor old Skelligs is gone off in a huff, account closed. Ah well, Skelligs advice to guarantee a lease in #8 was IMO highly inappropriate and the EIIS suggestion, while it has merit as a share finance avenue was not applicable when we are talking a straight loan. It is important to read posts!

Atomico

skelligs wrote: »

jeez - does anyone actually read posts these days?

I can see why people don't bother posting here anymore.

I'm not saying to give the loan for free, but some posters here seem to think the OP has to nget a huge return. No-one here knows anything about the business that the OP is looking at and therefore they CANNOT give informed comment.

The OP asked how he goes about to and what implications. I think I'm the only one that has given 4 options regarding how to go about it and others just want to bash the OP for evenb daring to ask for information.

Christ - this USED to be a good thread.

That then means that your comment was uninformed too. The funny thing is that your advice was more specific than other posts and yet you were comfortable giving this while also saying that we aren't in a position to give informed comment?!

We are not mind-readers and so all we have to go on is the info the OP is giving. And based on the posts the best advice we can give him is to seek professional advice and not rush into anything.