Private Investor vs Loan

[hully1029]

The wife and I are looking into opening a new business in our area. If successfully opened, projections are very promising to have a very fast ROI and become successful, rather quickly.

We could save a small amount (about 5-8k) to put towards it, but would need help with the rest (inventory mostly, pos system, other equipment, etc). Total investment would be around 40k to open the door. Would it be wiser to apply for loan for the remainder and pay the interest or try to locate a private investor and give up a portion of the business, ie appx 10% with the option to purchase investor portion at a later date?

In for all responses and critical thoughts.

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[thegrouse]

If it were me I would take the loan and have all the cards. If you are only talking borrowing 40-50K at say 5% interest over 5 years that is not much money in interest. Maybe you pay 10k in interest but you reap all of the gains. Any partnership will have some type of lawyer fees for a contract etc. Good luck

[Landrover]

Depends on what industry. POS lends itself to service industry / retail. Very difficult to find reasonable investors unless highly unique. I would also hold all the cards.

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[DCZ71]

If the investor is contributing 80-90% of the equity, they will own the majority of your company. Maybe there will be a waterfall, ie certain return hurdles, at which time your ownership would increase, but they will still own the majority.

[hully1029]

If it were me I would take the loan and have all the cards. If you are only talking borrowing 40-50K at say 5% interest over 5 years that is not much money in interest. Maybe you pay 10k in interest but you reap all of the gains. Any partnership will have some type of lawyer fees for a contract etc. Good luck

I like the idea of keeping 100% ownership. Thanks for your input!

Depends on what industry. POS lends itself to service industry / retail. Very difficult to find reasonable investors unless highly unique. I would also hold all the cards.

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The pos system wouldn't be a top of the line, but would be used as a retail system, with inventory services and such.

If the investor is contributing 80-90% of the equity, they will own the majority of your company. Maybe there will be a waterfall, ie certain return hurdles, at which time your ownership would increase, but they will still own the majority.

I think you misunderstood. I was referring to possibly using an investor for the money and only giving up 10-15% of the company. I would still be 85-90% owner.

[tkuehn5410]

Only reason to seek an investor is if you have no knowledge in the business or field, or if you are needing significant capital to start your venture. 40k is a very small amount to borrow, and if successful, you could grow the biz and pay off very quickly. Additionally, if you have an investor, there could be complications in the future...i.e. first store is successful, you want to open a new one, and he doesn't want to cough up the dough...

[Ryanm]

Is this going to be your primary income source when you open?

Will $5-8k completely tap your savings?

I would not look at a business partner unless it were an established franchise situation. You may want to look at pulling equity out of your home or 401k. There is a risk here, but all small businesses have a large amount of risk..

[hully1029]

Only reason to seek an investor is if you have no knowledge in the business or field, or if you are needing significant capital to start your venture. 40k is a very small amount to borrow, and if successful, you could grow the biz and pay off very quickly. Additionally, if you have an investor, there could be complications in the future...i.e. first store is successful, you want to open a new one, and he doesn't want to cough up the dough...

Beginning to heavily lean towards loan.

Is this going to be your primary income source when you open?

Will $5-8k completely tap your savings?

I would not look at a business partner unless it were an established franchise situation. You may want to look at pulling equity out of your home or 401k. There is a risk here, but all small businesses have a large amount of risk..

The business would not be primary source of income. I would continue working full time and my wife would run the business (she currently doesn't work) The 5-8k wouldn't completely tap savings, but would leave less than what is desired. I wouldn't be opposed to pulling equity out of home, but due to only purchasing home 2 years ago, I'm unsure just how much equity I have just yet. This business would not be a franchise situation. There is a high demand, a well established market, opportunity for a prime location, and would be much more convenient for established customers. There is obviously a risk, and it's a risk I am willing to take, but just need to know the best path to take. I appreciate the info!

[DCZ71]

I think you misunderstood. I was referring to possibly using an investor for the money and only giving up 10-15% of the company. I would still be 85-90% owner.

What I’m saying is that a sophisticated investor would not let you be an 85%-90% owner. You would have to give them the majority ownership. Therefore a loan, if you can afford payments, and are confident things will work out and you won’t default, would be the much better option.

[hully1029]

What I’m saying is that a sophisticated investor would not let you be an 85%-90% owner. You would have to give them the majority ownership. Therefore a loan, if you can afford payments, and are confident things will work out and you won’t default, would be the much better option.

Ahh.. im following. There is NO WAY I would run a business with only being 10-15% owner.

[scarecrow]

Check with your local small business group. Lee College in Baytown is involved in a small business group. They can give you advice and probably connections.

[Grayson]

What I’m saying is that a sophisticated investor would not let you be an 85%-90% owner. You would have to give them the majority ownership. Therefore a loan, if you can afford payments, and are confident things will work out and you won’t default, would be the much better option.

This is correct. I have clients who do this and I can assure you they don’t do it for 10-15%. Not worth the time or hassle, not to mention the return.

[Boomerang]

.

[M16]

No brainer on that small of an amount. Do a loan.

[miket]

I dont know, Im no business man. Just getting by in my own shop. But I do know I want 100% ownership and control either way. Sink or swim, 100% bootstrapper baby!