An important miss-belief
One of the most common
miss-beliefs is that investors are prepared to make "100 percent
financing" available to entrepreneurs. To many entrepreneurs believe
that they don't necessarily need to invest any of their own money in a
project, or to purchase real estate. If you don't have your own money
it might be convenient to think that somebody else can fund your
company or a real-estate deal.
During all times we have had and will have economic cycles. It is
inevitable that recessions occur in any economic system. The free
market economy is in-itself extremely self-healing, as fare as the
political class avoid to intervene. Politicians in Europe like in US
believe that they must intervene and fix things. The US government is
deploying staggering amounts of money that it is spending, in the
belief that it can avoid a repetition of the 1930s. But it was exactly
what the FDR governemt did and what caused the long and deep depression.
The risk level is equivalent to cash invested. If someone is investing
100 percent of needed capital he is also taking a 100 percent risk to
lose his money. In case the entrepreneur contributes with 50 percent
and the investor with 50 percent of the capital required each party has
taken an equal stake of the risk in the project. An entrepreneur who
does not contribute any cash to a deal have nothing to lose if his
business does not become profitable. Such deals does not make any sense
to investors (lenders).
Hard money lenders are investors too and do take certain risks that
they generally are very savvy to evaluate. If there are great deals to
be purchased why would a hard moony lender maker all of the money
available and let the entrepreneur keep all of the profit? If this was
the case the lender would certainly identify their own deals and, keep
the control of the transaction to realize all of the profits. No hard
money lender is willing to take all of the risk in a transaction. But a
joint venture as a structured partnership could make sense, whereby the
lender will take over certain control of the transaction, as well as a
significant share of the profits. Such a transaction is more risky than
a well-secured loan, and if the investor is bringing in most of the
cash required for the deal then the investor is going to require most
of the profits.
During the buyers market in 2006 hard money lenders had to make
100% loans if they wanted to stay in business. The market today is very
different. There aren't enough lenders to fund every good opportunity.
If an entrepreneur does not have anything to risk in the transaction
then it's simply not going to be a winning scenario for any kind of
investor, not even for a hard money lender.
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Business Plans
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