You’ll have many partners when investing in commercial property. One which will quickly become your favourite is the bank. Here’s why.
Let’s compare a typical lending scenario you might see in the open market place (aside from the banks) to a typical loan with one of the major banks:
The lending you might find outside of the banks is characterised into three categories:
- Borrow money now in exchange for profit share in the future:
- An ugly symptom of this type of partnership is the dilution of the decision making. I.e. Profit share usually means selling shares and ‘voting power’ so you no longer have complete autonomy with the direction of the company and the decision making process.
- Invest money now in exchange for repayment of loan (plus interest) with proceeds before taking any profit for yourself:
- This usually comes hand in hand with an ‘option’ for the lender to purchase shares in the business (see problems above). The alternative is you don’t make a cent of profit for months/years which means you may have to seriously alter your lifestyle.
- The interest rates can be terribly high
- It might also be easy to lose motivation with this type of borrowing because it extends the break-even point far into the future.
- Seed funding: Characterised by borrowing micro amounts of money from many investors (sometimes hundreds or thousands) in exchange for a promise of some kind, usually offering pre-release of the product or service and/or priority access:
- This requires a considerable amount of preparation beforehand
- Also destroys your level of flexibility because you’re typically committed to a particular result which needs to be achieved.
And now lets take a look at the borrowing you might achieve when using a bank:
- Banks stagger the repayments along the way at a certain & consistent interest rate
- Banks allow profit to be made from day one
Banks take none of the profits… I’ll say that again “they take none of the profits”
- Banks do not alter the flexibility of management or take any part in the decision making process of the company, allowing autonomy to chase opportunities
- Banks can lend up to 80 per cent or 90 per cent of the required equity (in some circumstances).
There are obviously benefits and risks for each type of funding, however, the anachronistic attitude of ‘not wanting to owe someone money’ should be dead and buried forever when the interest rates are low, the banks are hungry for business and there are opportunities everywhere.