First time Hard money lending to a local business questions.

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Frugalegal
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First time Hard money lending to a local business questions.

Post by Frugalegal »

I have an opportunity to invest in a local farming business. They want 25k at 5% offering me a 400$ payment monthly. What questions should I ask to know if this is a good choice to make? This is the first time I’d be lending money privately. What information or metrics should I ask for to make an educated choice? They have been in business for two years. The owner is someone my family knows personally an our families have had a good relationship for a long time. The business is a small scale farm to table shop. They want the money to open a new green house. I’ve been told second hand that the owner has zero debt and the business has zero debt. I happen to catch him right before he was going to the bank for the loan.

I feel this would be a great opportunity for me to establish myself in the local community as reliable money lender, as this business owner has roots in the community and would be a solid source of social connections. It would be a way to build good will.

I personally believe in his business model, low environmental impacts, local farm fresh produce.

Any advice or input would be appreciated. This is something I am passionate about, and a business I’ve been wanting to break into for along time, I for the first time have the financial ability to do so!
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RickBoglehead
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Re: First time Hard money lending to a local business questions.

Post by RickBoglehead »

"Been told" isn't what I would rely on.

Ask to see the financials.

What percentage of your assets is this? You were "cash poor" in August you said.

You want to be a money lender?
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Raybo
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Re: First time Hard money lending to a local business questions.

Post by Raybo »

Is this a no recourse loan or will you have some collateral?

I doubt they have "no debt." Do they have a home mortgage (do they even own a home)?

I would check their books with a fine tooth comb to make sure the $400/month is easy for them to pay. Do they grow things year round? If not, where will the loan payment come from in the non-growing months?

What happens if there is a bad year on the farm?
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retired@50
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Re: First time Hard money lending to a local business questions.

Post by retired@50 »

Frugalegal wrote: Sat May 15, 2021 7:52 pm I feel this would be a great opportunity for me to establish myself in the local community as reliable money lender, as this business owner has roots in the community and would be a solid source of social connections. It would be a way to build good will.
This passage makes it sound as if you want to open a bank.
Is that the case?
Is this community not already served by a bank?

Regards,
This is one person's opinion. Nothing more.
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cchrissyy
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Re: First time Hard money lending to a local business questions.

Post by cchrissyy »

That rate sounds too low.
For comparison, my credit union, who certainly has a stricter underwriting process than you do, and files a lien on the property, is presently charging a minimum of 4% on an investment mortgage.

If I was going to lend money, unsecured, to somebody who can't/won't use a credit card or a real bank, my rate would be much higher than those published rates to compensate for my extra risk. The fact you are family friends would make me more hesitant not less.
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

RickBoglehead wrote: Sat May 15, 2021 8:06 pm "Been told" isn't what I would rely on.

Ask to see the financials.

What percentage of your assets is this? You were "cash poor" in August you said.

You want to be a money lender?
This is a shared account between myself and my spouse. We are no longer cash poor. The sale of some property as well as good fortune has smiled upon us.
Makefile
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Re: First time Hard money lending to a local business questions.

Post by Makefile »

retired@50 wrote: Sat May 15, 2021 8:36 pm
Frugalegal wrote: Sat May 15, 2021 7:52 pm I feel this would be a great opportunity for me to establish myself in the local community as reliable money lender, as this business owner has roots in the community and would be a solid source of social connections. It would be a way to build good will.
This passage makes it sound as if you want to open a bank.
Is that the case?
Is this community not already served by a bank?

Regards,
Random facts - 2,900 new banks opened in the U.S. since 1990, but only 55 new banks opened since 2010. The Great Recession, interstate banking, and I bet technology, online banking, mobile banking, etc.--maybe even low interest rates too--have virtually shut down new bank formation. Every year for every 100 banks that go out of existence (either merger or failure) only 4 new banks open. A trend that has been going on since the 1930s I believe but much more intense since 2010. https://www.bankingstrategist.com/de-no ... ing-trends
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

Raybo wrote: Sat May 15, 2021 8:30 pm Is this a no recourse loan or will you have some collateral?

I doubt they have "no debt." Do they have a home mortgage (do they even own a home)?

I would check their books with a fine tooth comb to make sure the $400/month is easy for them to pay. Do they grow things year round? If not, where will the loan payment come from in the non-growing months?

What happens if there is a bad year on the farm?
Their property a 100 acre farm is part of an estate. As far as I know... they have no debt. But I’ll do my due diligence. Good call on the year round growing question, as well as the bad year question. Thanks.
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

cchrissyy wrote: Sat May 15, 2021 8:42 pm That rate sounds too low.
For comparison, my credit union, who certainly has a stricter underwriting process than you do, and files a lien on the property, is presently charging a minimum of 4% on an investment mortgage.

If I was going to lend money, unsecured, to somebody who can't/won't use a credit card or a real bank, my rate would be much higher than those published rates to compensate for my extra risk. The fact you are family friends would make me more hesitant not less.
Family friends, isn’t the right word for it. Both families are well known in a small community. They’ve done construction work for us before. Heavy machine operations. Laid a foundation and some excavation work.
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

retired@50 wrote: Sat May 15, 2021 8:36 pm
Frugalegal wrote: Sat May 15, 2021 7:52 pm I feel this would be a great opportunity for me to establish myself in the local community as reliable money lender, as this business owner has roots in the community and would be a solid source of social connections. It would be a way to build good will.
This passage makes it sound as if you want to open a bank.
Is that the case?
Is this community not already served by a bank?

Regards,
Well I don’t have enough to start a bank or I would. That’s what dreams of made of for me.
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

Makefile wrote: Sat May 15, 2021 9:19 pm
retired@50 wrote: Sat May 15, 2021 8:36 pm
Frugalegal wrote: Sat May 15, 2021 7:52 pm I feel this would be a great opportunity for me to establish myself in the local community as reliable money lender, as this business owner has roots in the community and would be a solid source of social connections. It would be a way to build good will.
This passage makes it sound as if you want to open a bank.
Is that the case?
Is this community not already served by a bank?

Regards,
Random facts - 2,900 new banks opened in the U.S. since 1990, but only 55 new banks opened since 2010. The Great Recession, interstate banking, and I bet technology, online banking, mobile banking, etc.--maybe even low interest rates too--have virtually shut down new bank formation. Every year for every 100 banks that go out of existence (either merger or failure) only 4 new banks open. A trend that has been going on since the 1930s I believe but much more intense since 2010. https://www.bankingstrategist.com/de-no ... ing-trends
Super interesting.
DaBombCat
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Re: First time Hard money lending to a local business questions.

Post by DaBombCat »

Private money lending can work out well for both sides, if you are giving something that the bank doesn’t provide, and you are paid appropriately for your service. For instance, people commonly use private lenders because they want more flexibility in the loan terms or to avoid sharing their personal financial situation. You can certainly price your offer at what you think is fair. However, his terms feel kind of light for a loan that would be difficult to collect on if he defaults.

Mark Kohler has a primer on youtube called How to Give Someone a Loan. It goes over some of the operational decisions that protect both sides from the most common lending problems.
SteadyOne
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Re: First time Hard money lending to a local business questions.

Post by SteadyOne »

I wonder why he can’t get a loan from a local bank, especially if he is well known in the community? Mortgage rates are quite low now.
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nuthinbutnet
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Re: First time Hard money lending to a local business questions.

Post by nuthinbutnet »

OP,

Asking this question on a Bogleheads forum is tough going, as the prevailing opinions here are formed largely by mathematics (the power of low fees and compound investing). I think you should go ahead with such a loan. It's a good rate when compared to bonds, certainly. And this is the kind of loan that has all kinds of trickle ramifications, from the impacts on your community to your own feelings.

Who is the farm selling its produce to? Is the farm to table a CSA, or a wholesaler? That does affect the outcome of bad weather, i.e. -- a hailstorm.
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Re: First time Hard money lending to a local business questions.

Post by RickBoglehead »

SteadyOne wrote: Sun May 16, 2021 7:21 am I wonder why he can’t get a loan from a local bank, especially if he is well known in the community? Mortgage rates are quite low now.
From the OP: "I happen to catch him right before he was going to the bank for the loan."
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Re: First time Hard money lending to a local business questions.

Post by RickBoglehead »

DaBombCat wrote: Sun May 16, 2021 12:52 am Private money lending can work out well for both sides, if you are giving something that the bank doesn’t provide, and you are paid appropriately for your service. For instance, people commonly use private lenders because they want more flexibility in the loan terms or to avoid sharing their personal financial situation. You can certainly price your offer at what you think is fair. However, his terms feel kind of light for a loan that would be difficult to collect on if he defaults.

Mark Kohler has a primer on youtube called How to Give Someone a Loan. It goes over some of the operational decisions that protect both sides from the most common lending problems.
https://www.youtube.com/watch?v=iiS52cuUT70
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Re: First time Hard money lending to a local business questions.

Post by qwertyjazz »

RickBoglehead wrote: Sun May 16, 2021 8:18 am
DaBombCat wrote: Sun May 16, 2021 12:52 am Private money lending can work out well for both sides, if you are giving something that the bank doesn’t provide, and you are paid appropriately for your service. For instance, people commonly use private lenders because they want more flexibility in the loan terms or to avoid sharing their personal financial situation. You can certainly price your offer at what you think is fair. However, his terms feel kind of light for a loan that would be difficult to collect on if he defaults.

Mark Kohler has a primer on youtube called How to Give Someone a Loan. It goes over some of the operational decisions that protect both sides from the most common lending problems.
https://www.youtube.com/watch?v=iiS52cuUT70
Interesting review - thank you
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Watty
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Re: First time Hard money lending to a local business questions.

Post by Watty »

Frugalegal wrote: Sat May 15, 2021 7:52 pm They want 25k.......
.....
I’ve been told second hand that the owner has zero debt and the business has zero debt.
If that is the case then they could likely just get the $25K by getting a car loan on a paid off car or truck or by getting a home equity loan and either of these would be at around 3%.

For amounts like that people will also juggle money with credit cards at 0% interest.
https://www.cnbc.com/select/best-zero-i ... dit-cards/

Frankly if they are financially sound then they would likely have $25K in the bank that they could use and not need a loan.

To be a bit more optimistic you also need to consider that it could be a good loan and everything could be going well but then the person, or their spouse, could get sick or die and you would need to deal with getting your money back then which not only could be unpleasant but it could also involve a lot of legal fees. You could also end up dealing with the loan in the middle of a divorce if they get divorced. One advantage that normal lenders have is that they have a staff lawyer to handle situations like that and do not have to pay some lawyer by the hour.

There could also be something like a storm that destroys the new greenhouse so you need to make sure that it is insured.

If they will be growing marijuana(either with or without your knowledge) then that also adds lots of complications even if that is legal in your state.
Frugalegal wrote: Sat May 15, 2021 7:52 pm I feel this would be a great opportunity for me to establish myself in the local community as reliable money lender, as this business owner has roots in the community and would be a solid source of social connections.
If you want to become the local loan shark you will need to charge a lot more than 5% since most of the people that you will be dealing with would not be able to get a loan with a traditional lender.
SteadyOne
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Re: First time Hard money lending to a local business questions.

Post by SteadyOne »

RickBoglehead wrote: Sun May 16, 2021 8:17 am
SteadyOne wrote: Sun May 16, 2021 7:21 am I wonder why he can’t get a loan from a local bank, especially if he is well known in the community? Mortgage rates are quite low now.
From the OP: "I happen to catch him right before he was going to the bank for the loan."
The old saying is that if you want to lose a friend, loan him money. Money corrodes even family relationships , not even talking about neighbors and friends.
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Re: First time Hard money lending to a local business questions.

Post by Abe »

I have had experience making loans and I would not make this loan even if there was collateral. $25k @ 5% with $400 monthly payment will take a little over 6 years to pay out, so 72.55 payments times $400 will pay back $29,020. You will only be making a little over $4k assuming everything goes as planned. It's not worth it.
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Average Investor
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Re: First time Hard money lending to a local business questions.

Post by Average Investor »

A friend of mine successfully made hard money loans for real estate. He would get 12% or more plus the deed in case of default. Just something to think about.
Tomorrow never knows.
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

Watty wrote: Sun May 16, 2021 9:26 am
Frugalegal wrote: Sat May 15, 2021 7:52 pm They want 25k.......
.....
I’ve been told second hand that the owner has zero debt and the business has zero debt.
If that is the case then they could likely just get the $25K by getting a car loan on a paid off car or truck or by getting a home equity loan and either of these would be at around 3%.

For amounts like that people will also juggle money with credit cards at 0% interest.
https://www.cnbc.com/select/best-zero-i ... dit-cards/

Frankly if they are financially sound then they would likely have $25K in the bank that they could use and not need a loan.

To be a bit more optimistic you also need to consider that it could be a good loan and everything could be going well but then the person, or their spouse, could get sick or die and you would need to deal with getting your money back then which not only could be unpleasant but it could also involve a lot of legal fees. You could also end up dealing with the loan in the middle of a divorce if they get divorced. One advantage that normal lenders have is that they have a staff lawyer to handle situations like that and do not have to pay some lawyer by the hour.

There could also be something like a storm that destroys the new greenhouse so you need to make sure that it is insured.

If they will be growing marijuana(either with or without your knowledge) then that also adds lots of complications even if that is legal in your state.
Frugalegal wrote: Sat May 15, 2021 7:52 pm I feel this would be a great opportunity for me to establish myself in the local community as reliable money lender, as this business owner has roots in the community and would be a solid source of social connections.
If you want to become the local loan shark you will need to charge a lot more than 5% since most of the people that you will be dealing with would not be able to get a loan with a traditional lender.
Thanks for your input. These are all things I kind of knew. I appreciate it none the less. I don’t want to be a loan shark, nothing so tawdry, I just want to invest in local businesses for fun an profit.
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

nuthinbutnet wrote: Sun May 16, 2021 8:16 am OP,

Asking this question on a Bogleheads forum is tough going, as the prevailing opinions here are formed largely by mathematics (the power of low fees and compound investing). I think you should go ahead with such a loan. It's a good rate when compared to bonds, certainly. And this is the kind of loan that has all kinds of trickle ramifications, from the impacts on your community to your own feelings.

Who is the farm selling its produce to? Is the farm to table a CSA, or a wholesaler? That does affect the outcome of bad weather, i.e. -- a hailstorm.
It’s on a major four lane road that all traffic passes through. As well as weekly visits to the local, farmers market. They also provide for a local grocery store. So the shop they have gets a lot of drive by traffic, weekend business at the farmers market and the remainder goes to local grocery I think at some kind of discount,

I am glad you understand where I am coming from. Supporting local business, not to mention the rate is better than a bond although much higher risk. The trickle down effects and social benefits are what appeals the most to me.
flyfishers83
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Re: First time Hard money lending to a local business questions.

Post by flyfishers83 »

I definitely wouldn’t do it for the money. You’re talking about a few thousand dollars at most with you’re loan probably at significant risk. If you really just want to support the business, do it for that reason.
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Re: First time Hard money lending to a local business questions.

Post by White Coat Investor »

Frugalegal wrote: Sat May 15, 2021 7:52 pm I have an opportunity to invest in a local farming business. They want 25k at 5% offering me a 400$ payment monthly. What questions should I ask to know if this is a good choice to make? This is the first time I’d be lending money privately. What information or metrics should I ask for to make an educated choice? They have been in business for two years. The owner is someone my family knows personally an our families have had a good relationship for a long time. The business is a small scale farm to table shop. They want the money to open a new green house. I’ve been told second hand that the owner has zero debt and the business has zero debt. I happen to catch him right before he was going to the bank for the loan.

I feel this would be a great opportunity for me to establish myself in the local community as reliable money lender, as this business owner has roots in the community and would be a solid source of social connections. It would be a way to build good will.

I personally believe in his business model, low environmental impacts, local farm fresh produce.

Any advice or input would be appreciated. This is something I am passionate about, and a business I’ve been wanting to break into for along time, I for the first time have the financial ability to do so!
5%? The going rate on hard money loans backed by real estate in first position is more like 10-12% plus two points. 5% seems like they're taking advantage of you. What is backing this loan anyway besides their good word?
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illumination
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Re: First time Hard money lending to a local business questions.

Post by illumination »

You just need to figure out if this is a gift or not. If it's not charity, its a terrible deal for the lender. There's high yield bond funds that yield over 5%, way less risk than this potential investment.

It really should be a double digit interest rate, and even then I would not do it if it was not secured with some form of collateral.
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Re: First time Hard money lending to a local business questions.

Post by TomatoTomahto »

Frugalegal wrote: Sun May 16, 2021 1:01 pm Thanks for your input. These are all things I kind of knew. I appreciate it none the less. I don’t want to be a loan shark, nothing so tawdry, I just want to invest in local businesses for fun an profit.
But you’re not investing in a local business. You’re making a loan. If the business does gangbusters, you’ll get your interest, nothing more.

Maybe it’s wrong-minded of me, but I’d never loan anyone $25k. $250k for a business, perhaps. $25k loan to me means something is rotten in the state of Denmark; you might be much more charitable.
I get the FI part but not the RE part of FIRE.
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Re: First time Hard money lending to a local business questions.

Post by SteadyOne »

Frugalegal wrote: Sun May 16, 2021 1:07 pm
nuthinbutnet wrote: Sun May 16, 2021 8:16 am OP,

Asking this question on a Bogleheads forum is tough going, as the prevailing opinions here are formed largely by mathematics (the power of low fees and compound investing). I think you should go ahead with such a loan. It's a good rate when compared to bonds, certainly. And this is the kind of loan that has all kinds of trickle ramifications, from the impacts on your community to your own feelings.

Who is the farm selling its produce to? Is the farm to table a CSA, or a wholesaler? That does affect the outcome of bad weather, i.e. -- a hailstorm.
It’s on a major four lane road that all traffic passes through. As well as weekly visits to the local, farmers market. They also provide for a local grocery store. So the shop they have gets a lot of drive by traffic, weekend business at the farmers market and the remainder goes to local grocery I think at some kind of discount,

I am glad you understand where I am coming from. Supporting local business, not to mention the rate is better than a bond although much higher risk. The trickle down effects and social benefits are what appeals the most to me.
So, then you are not asking for an investment advice.
“Every de­duc­tion is al­lowed as a mat­ter of leg­isla­tive grace.” US Federal Court
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Re: First time Hard money lending to a local business questions.

Post by placeholder »

White Coat Investor wrote: Sun May 16, 2021 2:09 pm 5% seems like they're taking advantage of you.
As the OP seems to have approached them it's more like "you wanna be the bank then 5% otherwise we go back to plan A."
slickracer
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Re: First time Hard money lending to a local business questions.

Post by slickracer »

I wouldn't do it. My FIL passed on 3 hard money loans on to my Wife and Brother in Law when he passed.. As the banker in the family, I get the joy of servicing them. Things were not done as they should have been in the past and I've had to pass on the shortcomings that they don't want to hear about as they don't understand the risk. One is badly underpriced due to high LTV and type of collateral, one is a 2nd lien over 80% LTV and the third one is pretty risk free. They are all currently performing but will drag out for 27 years. Having a lien does not remove all risk.

It's a headache you don't need.
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

TomatoTomahto wrote: Sun May 16, 2021 2:50 pm
Frugalegal wrote: Sun May 16, 2021 1:01 pm Thanks for your input. These are all things I kind of knew. I appreciate it none the less. I don’t want to be a loan shark, nothing so tawdry, I just want to invest in local businesses for fun an profit.
But you’re not investing in a local business. You’re making a loan. If the business does gangbusters, you’ll get your interest, nothing more.

Maybe it’s wrong-minded of me, but I’d never loan anyone $25k. $250k for a business, perhaps. $25k loan to me means something is rotten in the state of Denmark; you might be much more charitable.
Well okay then, how would you suppose I go about finding a local business to invest in? What’s the process for this? Pretend I know nothing. Because you are right this is a loan, without endearing myself to someone through good will, where would I make the connections to be able to take part in something like this?
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

slickracer wrote: Sun May 16, 2021 7:59 pm I wouldn't do it. My FIL passed on 3 hard money loans on to my Wife and Brother in Law when he passed.. As the banker in the family, I get the joy of servicing them. Things were not done as they should have been in the past and I've had to pass on the shortcomings that they don't want to hear about as they don't understand the risk. One is badly underpriced due to high LTV and type of collateral, one is a 2nd lien over 80% LTV and the third one is pretty risk free. They are all currently performing but will drag out for 27 years. Having a lien does not remove all risk.

It's a headache you don't need.
Thank you for your thoughts. Do you have any idea where I could go to find local businesses to invest in?
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Frugalegal
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Re: First time Hard money lending to a local business questions.

Post by Frugalegal »

SteadyOne wrote: Sun May 16, 2021 3:20 pm
Frugalegal wrote: Sun May 16, 2021 1:07 pm
nuthinbutnet wrote: Sun May 16, 2021 8:16 am OP,

Asking this question on a Bogleheads forum is tough going, as the prevailing opinions here are formed largely by mathematics (the power of low fees and compound investing). I think you should go ahead with such a loan. It's a good rate when compared to bonds, certainly. And this is the kind of loan that has all kinds of trickle ramifications, from the impacts on your community to your own feelings.

Who is the farm selling its produce to? Is the farm to table a CSA, or a wholesaler? That does affect the outcome of bad weather, i.e. -- a hailstorm.
It’s on a major four lane road that all traffic passes through. As well as weekly visits to the local, farmers market. They also provide for a local grocery store. So the shop they have gets a lot of drive by traffic, weekend business at the farmers market and the remainder goes to local grocery I think at some kind of discount,

I am glad you understand where I am coming from. Supporting local business, not to mention the rate is better than a bond although much higher risk. The trickle down effects and social benefits are what appeals the most to me.
So, then you are not asking for an investment advice.
Eh, maybe? It’s more of a conversation an I welcome all constructive input.
PopMegaphone
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Re: First time Hard money lending to a local business questions.

Post by PopMegaphone »

If you're thinking of this as charity go for it, but this family seems to have good credit so I don't understand why you are inserting yourself in this situation. It seems like you're absorbing risk for no real reason.
bradinsky
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Joined: Sat Jul 21, 2018 6:32 am

Re: First time Hard money lending to a local business questions.

Post by bradinsky »

Make friends with a local CPA. My bet is they know what’s happening in the business community & possibly they can match you up with someone. If you make the $25K loan at 5%, then either you are very generous & giving, or very naive. Good luck deciding!

Brad
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JonnyDVM
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Location: Atlanta, GA

Re: First time Hard money lending to a local business questions.

Post by JonnyDVM »

Abe wrote: Sun May 16, 2021 9:48 am I have had experience making loans and I would not make this loan even if there was collateral. $25k @ 5% with $400 monthly payment will take a little over 6 years to pay out, so 72.55 payments times $400 will pay back $29,020. You will only be making a little over $4k assuming everything goes as planned. It's not worth it.
That was my first impression. Unless this was somehow risk free, which I think it’s safe to say it’s not, you aren’t getting enough back.
I’d trade it all for a little more | -C Montgomery Burns
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