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Why banks are your best investment partner

14 January, 2020
Categories: Investments

Looking for an investment partner? You won’t find one much better than a bank. Here’s why.

If you’re running a business or leading an investment, you want to make your own decisions and hold onto your own profits. Even if taking on an investment partner, these are two “must-haves” for the typical business owner or investor.

Handing over that decision-making power to an investment partner who’s put money into your venture can be like a surgeon asking patient where to put the scalpel. And at the first sight of profit, do you really want to be handing out your earnings to someone else?

But the banks, despite their public scrutiny, don’t have the typical parameters found in your average investment partnership. They’re even less greedy than you think.

Here, we’ll look at why your best investment partner is the bank. But first, what are your alternatives for an investment partnership?

Types of investment partner

If you have a good product, service of investment offer, it won’t be hard to find someone with the capital to invest.

But their investment appetite will only be sweetened when they know how big you can make their honey pot. Put simply, if you’re looking for an investment partner, you’ll need to answer their question, “What’s it in for me?”

Investor partners can fit into three categories:

1. Lend money now in exchange for profit share in the future

This is what you’d expect, right? Someone lends you money and they want a portion of the profits you’ll make in the future.

One ugly symptom of this investment partnership is these investors collect a lot of the decision making. This means that you, the primary investor, no longer have complete autonomy to make decisions and solely dictate the direction of the company.

2. Lend money now in exchange for repayment of loan (plus interest)

This seems a typical banking scenario. However, there may be an option for the lender to purchase shares in the business.

The interest rates can be high in these scenarios.

man with suit extending handshake

These investors need to be repaid before you take any profit for yourself. So, your break-even point is extended even further, as they are the first ones to collect on the investment’s return. You do the hard work and they are the first to reap the benefits.

3. Seed funding

Seed funding is characterised by borrowing micro amounts of money from many investors (anywhere from hundreds to millions of dollars), in exchange for a promise of something in the future. For example, priority access to or first use of your product or service.

Seed funding requires a considerable amount of preparation beforehand. It also destroys your level of flexibility because you’re typically committed to a particular result which needs to be achieved. You need to ensure you can scale or build on the initial investment.

Why banks are the best investment partner you’ll find

Now, let’s look at the scenario you’ll face when taking on the bank into a property investment partnership.

1. Banks take no part in the decision-making process

The banks don’t restrict your flexibility or take any part of the decision-making process of the company. This means you have the autonomy to chase opportunities without the ball and chain of a high-maintenance investor.

2. Banks allow profit to be made from day one

Because banks stagger repayments and charge a relatively consistent interest rate (particularly if you choose a fixed rate loan), you can earn a profit from day one. You’re not obligated to repay them with the first chunk of profits you receive.

3. Banks take none of the profits

That’s right, banks don’t dilute your total return by taking your capital gain. They take none of the profits. They simply want to reclaim the principle amount they’ve lent you.

Sure, the banks charge interest. Which is why – if your investment strategy involves cash flow – you should ensure your yields are higher than the interest rate you’re being charged.

Investing in commercial property, for example, usually provides these high yields. While Australia’s current interest rate environment is offering interest rates of between 3 per cent and 5 per cent, the country’s commercial property investment market is offering yields of around 6 per cent 12 per cent.

The banks take their 3 per cent to 5 per cent. And you keep the remaining 3 per cent to 7 per cent.

There are benefits and risks for each type of investment partnership. But saying, “I don’t want to owe someone money” should be a sentiment left in the wind when interest rates are low, banks are hungry for business and there are great investment opportunities to be found.

Properties & Pathways is a commercial property investment company in Australia. We offer investment in high quality commercial real estate through structured syndicates.

If you’re an individual, sophisticated investor, or institutional investor, get in touch with us today for a free investment consultation.

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