How can/would you structure a $100K loan from four unrelated investors ($25K each)?

Question

I'm starting to look for private funding. Thing is, it's going to be easier to find people willing to put $25K into this product than it will be to find people willing to put in $100K or more.

If I need to borrow $100K but have access only to $25K investors, is there a way to do that? I was thinking the cleanest approach would be to just have one note with four co-lenders, but they might not like that; it could get messy if things go wrong and they don't know each other. I don't think you can have four separate notes, either, assuming that they all want equal collateral.

I then thought to do a single-purpose LLC that would loan me the money, but is it really worth the time and expense of creating an LLC just to hold one note? Plus, that might raise all sorts of securities issues, since now I'd be selling shares in an LLC and not just borrowing money.

Any way to make this work with smaller lenders?

Jon Holdman · Answer

I've done it with the LLC. I was on the lending side, and the amounts involved were larger, but in CO the costs for an LLC are minimal. Your four investors, NOT YOU, should form the LLC, sort out the operating agreement, put in their money and then the LLC should lend it to you. Unfortunately, I'm guessing this may be overly complex for your four investors. If you're the one who forms the LLC, and each contributes, then it lends the money to you, then you're a syndicator, and your life is much more complex. I doubt that's worthwhile for only $100K. Really, the best bet is to find investors with enough cash to do a deal by themselves.

Bill Gulley · Answer

As Jon points out you will need a conduit, some structured entity to consolidate the funds. If your investors are simply lenders, they would need to form their own entity and loan you money as that entity. If they will participate in anything, even if the are passive investors, you could be in the entity and they simply make contributions to capital and keep funding through teir capital accounts. As to the note, you should look at a Partitioned Principal Note, where there are three or four parts that are consolidated into a Total Principal Amount. Think of it as 4 notes described in one instrument and secured by one security agreement. The Operating agreement of an LLC could govern the PPN and how it operates, so could a trust. Without some conduit there is really no way to put your investors on equal footing to participate in the manner you described. I suggest too that you check on your State's applicable laws regarding securities and offerings,it sounds like you may be dealing with sophisticated investors under SEC requirements, you certainly want to avoid SEC requirements.

Bryan Hancock · Answer

Chris Yates has a fund set up to take in small investments like this where he pays his investors around 8% preferred and 25 percent of the upside in projects. I think it is a 505 PPM, which is like expensive for a single deal. If you are planning on continuing to do this you may consider spending the money to set up a fund though. We have a new fund set up and taking in dollars is a world easier with it than trying to piece together money and deals at the same time when cash is needed.

Account Closed · Answer

i was under the impression you couldn't comingle funds...looking forward to hearing others' input as well

Scott Hubbard · Answer

These things are not very easy but I believe Jon has the right idea. It is best to create a loan agreement between you and the investors which is certainly complicated. Perhaps a commercial loan arrangement between your LLC and their LLC where they provide you debt financing and use a UCC-1 security agreement. The title is held in your LLC and you have the funds under your control for the term of the loan. Also, since capital preservation is key, the loan arrangement should call for interest-only payment. The major drawback is that you need to have a pipeline becuase, like any loan, you will be paying a per diem. These types of arrangements are best put together using an attorney intimate with commerical finance. There are many ways this can be accomplished. You can utilize a letter of credit issued by the capital investors secured against funds they have on account. This is used if they also want to participate on the upside. Good Luck!

Jarred E. · Answer

If they are purely debt partners and not equity partners, I would have 4 seperate notes (4 seperate mortgages in place), I use a 3rd party trust or escrow agent to hold funds(cheap) and call me crazy but for the security to the investor above and beyond being the note and to ligitimize the transaction, I personally guarantee to my debt partners. Beleive it or not, most wont even file the mortgage because of my personal guarantee. This is the easiest most inexpensive way I know to raise small money for any one deal. You could however run a a risk of safe harbor violations if you are rasing capital and offering a rate of return to an unaccredited investor. I only know enough to be dangerous so I too will be interested to hear others opinions