how does investment work?
Lets say I want to buy a cafe but Im short about £10,000 what could I offer people as an incentive to give me money? If I I want to be in sole charge of the business, that is, I dont want a business partner that I need to consult with what do I need to ask for? Is finding an investor the same as just taking out a personal loan? Lets say 2 people can give me 5000 each. Would I have to repay the original 5000 and money on top in which case how would this figure be worked out or is there another type of investment where they invest the money on the pretense that may not get it back but make money from the profits along the way. What are the advantages of an investor over a bank loan?
I think I need investment for dummies! Confused!
Comments
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July 4th, 2010 at 7:22 pm
Ok Jade.. So here are the facts.
Let us go by the example you have given. Assuming that your two friends give you 5000 GBP each, what is its percentage on the overall capital of your business? If your cafe is worth 100,000 pounds then your friends’ investments will be only 5% each. But if your cafe is worth 20,000 pounds, and you are short by 10000 pounds then you are seeking a 50% investment from your friends.
So, in the second case of 50% investment, your friends would definitely expect more involvement in decision making than the first case where they would just hold 5% each.
Regarding the repayment – It all depends on the type of agreement you sign with your friends. If your agreement terms the financing as a loan from your friends, then you have to pay the whole amount with interest (whatever % you had agreed)
OR
if your agreement describes the financing as partnership then you need to give them the respective percentage of profit or loss depending on their investment.
GENERAL ADVISE: If your financial requirement is only for a short term, go for a loan, that will give you a free hand in decision making. If you want to expand your business or go to the next level, enter a partnership. Sacrifice a bit of your decision making rights for partnerships with brilliant, able and like minded people whom you can trust.