Should you be a lender or an owner when it comes to investments?
Whether you should be a lender or an owner when it comes to investments is a matter of personal preference, business experience and long-term commitment to the company. If you are trying to decide your position as an investor, you should consider these factors. If you decide that you want ownership, you might make an investment offer that includes the stock or voting rights as a part of the negotiations. If you decide to be a pure lender, draw up a contract detailing exactly when you be paid back as well as the interest rate on your loan.
Personal preference-some people love the business machinery and some people don't. If you are excited by business and like to know what is happening with your money at all times, you might want to seek partial ownership when you invest. On the other hand, if you don't care at all for business and only care that your money makes you more money-eventually-you might fare better as a lender than as an owner. When deciding between lending and owning consider how involved you want to be with the day-to-day business and decision process of the company. If you feel like you can let the owners run it, lend the money. If you feel like you want to have a say in the decision making process, you should try to buy into the business as an owner.
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Business experience-if you have no business experience you might do better as a lender than as an owner. It will not do you or the company any good if you are trying to learn the financial ropes as a partial owner. Then again, if you have a degree in business, marketing, or finance, this might be the perfect time to put your degree to work. Also, if you have run a business similar to the business that you are planning on investing in, try to buy a portion of the company and use your experience to benefit all of the owners and all of the investors.
Longevity of commitment-another thing to consider when you are making your decision about investing as a lender or investing as an owner is the time frame that you are interested in investing. If you intend to lend your money, be paid back and collect the interest over a couple of years you should lend as a lender. You do not have the long-term interest in the company that an owner needs to have. If you are planning to invest in the company for the long haul, it might make more sense to be an owner investor. In fact, the longer that you plan to invest, the more seriously you should think about the possibility of not just investing but buying into the company.
Of course, there are a number of other factors that might influence whether you invest as a lender or as an owner. One thing to consider is your relationship with the business owner. You might have already discovered how hard it is to work for your family members or your friends. To avoid loss in these areas it might be smarter to go into business together than to get into a situation where one of you is the lender and one is the owner. The relationship of business partner might strain friendships but at least each friend is equally responsible for decisions. Bad feeling breed when one person is making all the decisions with another person's money. If you are considering investing in the business of a family member or close friend consider whether your relationship can withstand that person making decisions about your money. If you don't have complete trust in the other person's decision-making abilities and business sense, don't invest as a lender. If you don't feel like the two of you can make decisions together, don't invest as an owner.
