Tips for determining how long you should lend your money
You have decided to make money by lending money but wonder how long you should consider lending your money for. The following are some tips for determining how long you should lend your money.
Decide how much risk you are willing take-in general, the longer that you lend out your money, the lower the risk and the lower the return. Most investments are for at least five years. If you lend in a more aggressive environment, say two years, you might be guaranteed a higher interest rate than you would over the course of five-year loan or even a ten-year loan. If you need a speedy return on your investment this might be a good idea for you. On the other hand, short-term loans might be risky because most businesses don't turn a positive cash flow during the first year or two of business. If you are investing in a business that "guarantees" a quick return of your investment, you might be working with a business owner that is overly optimistic about the chances of succeeding in business.
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Look at the business plan-any business worth lending to should have a tight business plan with projected profits. Get your financial advisors to look over the business plan before you invest. Find out if the terms of payment are realistic. Consider competitive businesses in the same area. What is their profit margin? You might talk with investors that have invested in similar opportunities. If it is realistic to make a short-term investment, by all means do so. However, it is much more likely that you will need to lend your money for a medium (5-10 years) to long (10 years or more) period if you are to expect a decent return.
Consider the advantages of short-term investment-the main advantage of making a short- term investment is the potential for rapid growth. If you are investing in real estate in a booming market, you might realistically expect a 20 to 30% return on your investment over only a couple of years. Markets that boom, like the real estate market does, favor the short-term investor. In fact, you might find that in booming markets, by waiting too long, the market trend may reverse and leave you with less from a long-term investment than you would have made from a short-term investment. The other advantage of short-term investments is that you will not be without your money for very long. If you want to grow your money and then use it or invest it elsewhere, you might do better in a short-term lending situation.
Consider the advantages of long-term investment-the main advantage of the long-term investment is the stability of the investment. Long-term investments in businesses are like investments in the stock market. That is, there might be day-to-day fluctuation but you don't try to capitalize on that fluctuation. Instead, you focus on the slow but steady increase that is realized over the long-term. These investments grow over the years and, hopefully, mature at about the same time, as you need them. Sometimes these long-term investments are such that you can receive the interest payments while leaving the original money invested in the business.
Research your investment-no matter how long you plan to invest your money for, find out what kind of fines and penalties you will face if you decide to withdraw your money early. It is hard to say what is going to happen over the course of a few years. The longer you plan to invest, the more important it will become that you can get your money if you need it.
