Investor returns question

[Dpierce37]

*wow..that business/finance section is dead*

Well I am working on a new business plan (Importing). It's a work in progress that will require some capital before I make any returns. I have people whom I have discussed my plans with and have offered to help with investments. I am working on a proposal right now for a loan from the bank, as well as something to show potential investors.

Now my question is, what kind of returns does someone you borrow money from, expect? Would it be the total plus a percentage in one lump sum, or more of a monthly return with a certain percentage added to it until the initial principal is reached. For example, if I was loaned 10K, do I tell that person he/she would receive $1000 plus a percentage that we agree upon a month for 10 months.

I am not sure how to approach this, and would love some advice.

[Dpierce37]

Anyone?

[vette74]

I think someone would need a minimum of 10% return if it is not risky and it goes up from there. On payback I have seen both ways what ever works. Get a financial calculator and start pluging in rate of returns.

[Dpierce37]

vette74, so both ways have worked...I guess that was more of my question. It's not really risky...the market is right. A lot of stuff I have to weed through.

Thanks for your input.

[eeven73]

[Wakebrad]

Getting money from a bank is tough right now, from what I hear. You can find investors both ways, some that will loan you money at an interest rate, usually fairly high. Or equity investors who will own a percentage of the business. It just depends on the type of investors you're looking for and who you can sell it to.

The percentage you're going to get is relative to the perceived risk. If there is a solid business model (IE, hundreds or thousands of proven cases) you can find a bank loan, and the perceived risk will be lower. If you're doing something new the risk will be seen as higher and you'll need larger returns.

When you're looking at your numbers I'd say 10% per year minimum. Whether that money is paid back in dividends or reinvested depends on your model and your investors.

[Dpierce37]

Wakebrad, Thanks.



eeven73, Thanks.



I am putting together a business plan, and I hope it is solid. This is something to start small, and hopefully expand in the future. I plan on keeping my current job and having my soon to be misses move her office into the space. I have invested a lot of time into research....and now just have to grow a sack and do it.

[brew]

If you have a problem lining up bank financing, explore SBA loans before you go the private equity route. When you bring in investors you've got someone else's hand in your business and sometimes it's hard to keep them out of the decision making process. There are also local development districts in most states that provide loans to startup businesses. The government gives grants to these districts to provide loans for new business. You should be able to check with a local CPA/banker/politician to find out if there is a development district in your area.

Also, are you just looking for private equity loans or are you looking for true investors that take an ownership percentage? That can make a difference in what the investor is looking for as far as return.

[ohsix]

Dpierce37, I, with a partner, started a company last year. We started an oil company and raised capital by letting people invest directly into the wells for a percentage of cost, plus a "promote" fee. The promote fee was just figured per point. For example, we charged $2,500 per point, so if a person wanted 10% of a well, they would pay 10% of the cost to drill that well, plus $25,000 promote fee. That's just a common way to raise capital in the oil industry. Another way is to be "carried". This is a little more complicated. If you are carried for an eighth (1/8, 12.5%) the investors pay 100% of the costs, but you get 12.5% of the well. So for each 1% an investor takes, they actually pay 1.14286% of the cost to drill and complete the well. This covers their 1% plus your 1/8th of a percent for each of there points. 1.14286 x 87.5=100


I'm not sure how the importing business works or what you are importing, but I think a good way to raise capital would be on a carried basis. Maybe you could get investors to put up 100% of the money, refund them their capital money as you make it back, and after payout, you start keep 12.5% or 25% of the profit and they keep getting 87.5% or 75% of the profit.

The idea is to use other people's money and forgo some profit until you make enough that you can use your own money.

[Dpierce37]

ohsix, I do like that 100% idea. And brew, this would be private equity loans, no ownership is being offered.

[lcap]

Depending on the idea I expect part of the pie and a ROI of at least 18%.

I know several entrepreneurs who went the route Brew suggested--SBA backed loans. The SBA likes bigger loans but expect some paperwork. People say it's a "ton o paperwork" but it really isn't any more than anyone expects when loaning money on a venture.

Now if you have a "minority" that is a partner the SBA loans are much easier. If you plan to sell to the Federal Government, then a "minority woman" is the golden goose rainmaker.

[nu2dagam]

[lcap]

nu2dagam,

There is no limit on what you can do or how much money you can make! Sole Source contracting, up to 20% price preferences, loans, grants for 9 years in the 8(a) program. Learn to play the Kings/Queens game and your golden.

[brew]

lcap, I didn't tell you this, but I'm sure you already know. Establish a corporation with your wife as the president and majority stockholder and you as the primary employee. Then you have a minority controlled company that is able to bid on jobs that you can't.

[brew]

[JoeyJojo]

Not just that easy. She better know her stuff about what is going on in the company and you must also file to be a WME/DBE company. some states is easier than others. wme/dbe isnt a free meat tiket either. some states there is a lot of competiton between the minority businesses. but it is an advange

[Dpierce37]

brew, I see what your are talking about. I don't see me needing much capital to start, but I do see it taking a bit for the returns to start generating. I would have to deal with advertising, marketing (I have friends who do both and whom I have talked too). Also going to have to build a website, but I also have someone that can do that.

It's tough with importing and people wanting instant money returns....it takes anywhere from a month to 1 1/2 months for the product to arrive. I have a lot of numbers to crunch.

[lcap]

[JoeyJojo]

does it have to be native american and how well do i have to know her?

[lcap]

[brew]

[lcap]

brew,

Not just in construction. The Feds are the largest buyers of goods and services in the entire world. From Computers to I.T. services to logistic support to bombs. The Feds have mandatory requirements for participation, not voluntary goals. Cool thing about the Feds is, you make the Contracting Officer happy, and you'll be spoon fed for a long, long time. Look at Haliburton, Kiewit, CH2M Hill, Bechtal, et. al.

[JoeyJojo]

[lcap]

JoeyJojo,

Just give her the titles that include, "Director Of First Impressions," have her answer the phones and your golden.

[Wakebrad]

D$, you can also talk to the local Small Business Development Center. I know in Dallas you can go, setup an appointment and talk to someone with a lot of business experience. They were very helpful for a project I was looking into. They can help you with your model and give advice on financing. Cities provide this service for free to help small businesses. They foot the bill.

[oshensurfer]

Dpierce37, I think some of this may be getting mixed up on whether it's a loan or an Investor. Loans are generally straightforward even in mezz type financing, but investments OTOH can be really creative. Here's how it works in the deals I see.

5 scenarios for debt (there are more, but this is what I see frequently):
Conventional Loan rates are currently Prime + 1 plus fees. (Banks)
Hard Money Loans are Mid-teens with 5 points right now plus fees and depending on the deal can be tiered on a schedule. (These are when banks won't finance you, but you still think you've got a deal to sell)
Notes from High Net Worth individuals vary. 12-18%, but no where near 10% currently, but this also depends on the loan amount. i.e. a $10,000 loan can't demand as much as a $1M loan so, a $10k loan may only be able to get a 10% ROR.
Large Funds - depends on the situation and deal.
Mezzanine Loans - Multiple players, multiple lien positions, multiple rates, yada yada yada. This won't apply to you. You need a hard asset here.

For our equity or investors, there is usually a pref. or Preferred Rate of Return, sometimes referred to as IRR or XIRR. This is the rate of return you have to make before you can get paid anything over your fees and expenses. It is in the 12-14% range right now in order to entice folks to invest. This tips in the deal makers favor following the investor hitting his/her pref, but AFTER all expenses and fees, including "debt" is taken out.

For example, the waterfall could look something like this after fees and expenses:

0-12% IRR on the deal, 100% to the investors, Entrepreneur 0%
12% -15% on the deal, 50% to the investor, 50% to the Entrepreneur.
15% and up; 100% to the Entrepreneur.

Make sense? You'll need a business plan and proforma to show to a lender and to prove you can make your deal work.

Good Luck! Call me if you have any questions.

[booby bunny]

[Dpierce37]

Wakebrad, thanks, just looked it up. Sounds like an appointment is in order.

http://www.ci.austin.tx.us/sbdp/


oshensurfer, yea man..we defiantly need to sit down and talk.