Investor Financing vs Bank Financing
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  1. #1
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    Default Investor Financing vs Bank Financing

    High-tech, multi-turret machine shop utilizing the latest technology from INDEX/TRAUB with a 40 year family background in machining located in the Midwest seeking capital investment. I’m curious if anyone has experience with seeking investors who are interested in these types of businesses? Currently we are at our machining capacity, and have an opportunity to expand our business significantly with an already established customer. We would like to explore options that don’t include traditional bank financing, and would love feedback from the practical machinist community regarding anyone’s experience with trying to use investors for expansion or where to look for investors interested in job shops.

    Your feedback is greatly appreciated.

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    After spending the last fifteen plus years as a manufacturing consultant my piece of advice is stay away from a partner/investor or venture capitalist. Nothing can bring a business to its knees like having someone over your shoulder continuously checking numbers and making suggestion or out right making decisions without you.

    If you are doing well enough now that you you feel confident in an expansion (Without seeing your business plan and numbers) I would advise you to stay right where you are,,, for now. Obviously you are showing a profit or you wouldn't be considering an expansion. If this is the case just bank the profits until you can reinvest your own capital. The market may look good for you right now but as we all know, things can change in the blink of an eye and the last thing you need standing over you in a crunch is an angry investor wanting to cut his losses.

    "The only time to take out a loan is when you don't need one"

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    Ask the customer to invest in the process. They would get a discount for so many years. You would pass the cost of investment on anyway, and it helps lock in a commitment from them. This kinda think happens and is a win win for everyone. You just have to find the right person to get better info from. Maybe a consultant. Probably not something people would want to talk about on the interwebs though.

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    debt and equity are two ends of a continum with many shades of gray in between. risk/return for the investor gets flipped from one end to the other. The problem is, for small private companies, the risk for minority/outside equity is really really high....so its get really really expensive. most common would be mezz - a proper note secured with coupon plus a meaningful percentage of the business. Oh, and you now have a boss, one with a lot of power, you on speed dial and likely knows f all about the business. I would never work for venture capital

    btw the number job of the entrepreneur is never give up any of that precious equity. Get bank financing, factoring or a lease first.

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    If you think a bank is tough, wait until you sell someone else a part of your business. Its easy to keep a banker at bay, just pay him what you promised, when you promised. A part owner, not so much.

    What is your problem with banks? Bad credit, bankruptcy, judgements, or other unfavorable history?

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    US Bank
    Machine Tool Finance Div
    For a lease

    Don't know the agent for Iowa


    --------------------

    Think Snow Eh!
    Ox

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    First post and they are hitting us up for money ?

    Jeesh.

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    Quote Originally Posted by Ox View Post
    US Bank
    Machine Tool Finance Div
    For a lease

    Don't know the agent for Iowa


    --------------------

    Think Snow Eh!
    Ox
    Machinery finance resources is another option. They beat US bank by a reasonable amount on interest on my last purchase(forget what it was at this point). No financial review up to 500K if you don't want them snooping in your finances.

    mfresources.com

    Not affiliated, just a customer.

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    Thank you all for your valuable feedback. I think the lease option is probably the best way for us to mitigate risk after reading all of your posts. I will definitely explore the 2 options you mentioned. My concern with traditional bank financing is making a major investment, and then seeing a downturn in the economy, or losing the customer for an unforeseen reason. I know risk is a part of growth, but trying to mitigate it wherever possible. Even if I'm dealing with more headache, or higher interest rates it seems like avoiding traditional financing might prevent us from being a job shop statistic in a downturn.

    Thanks again!

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    Your pov is wrong.

    Venture financing is much better, but much more costly, and much more tied to both profitability and growth.
    If You are making excellent profits venture financing will be very easy to get.
    But if you need say 100k, you get 200k and end up paying 1M, plus some residual ownership stake.

    Forget interest rates.
    Look at liability and resale values.
    A 100k machine with high resale value might net a 20-30k$ max loss, after a period of months - 1-2 years.
    If you don´t make 30k in 6 months, forget machining.
    A 100k machine must make 10-20k per month.

    Haas financing essentially means you put 20-30% down and that is your loss.
    After that, the machine can always be sold fast and you end up with no debt and no hassle and no machine.


    Quote Originally Posted by midwestmachinist View Post
    Thank you all for your valuable feedback.

    I think the lease option is probably the best way for us to mitigate risk after reading all of your posts. I will definitely explore the 2 options you mentioned. My concern with traditional bank financing is making a major investment, and then seeing a downturn in the economy, or losing the customer for an unforeseen reason. I know risk is a part of growth, but trying to mitigate it wherever possible. Even if I'm dealing with more headache, or higher interest rates it seems like avoiding traditional financing might prevent us from being a job shop statistic in a downturn.

    Thanks again!

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    You also need to get an accountants view of tax benefits,writeoffs ,etc.Leasing is costly,but costly deductable, as noted,make the payments and the finance company wont bother you,and at the end of the lease,you can buy the machine for a set amount....IMHO,any metal turning business should be looking into the effects of electric cars on their operation............and any financier will want recourse to all your assets.

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    I don't know anything about this personally, but my neighbor just lost his 7 year old business to an investor who called in his loan without any notice. Prior to that the investor was constantly sticking his nose into the business trying to make decisions on hiring, payroll, etc. I only heard one side of the story, but it sounds like there was some personal problem and some coaching from his children that made the guy petty and vindictive and eventually led to the loan getting called and the doors getting shut. I would hope (maybe naively) that a bank would keep it on a professional level and not ruin a business and force a bankruptcy for personal reasons.

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    Venture Capital for this business will be very hard to find. VC's are looking for 100x their money in 5-7 years, and they want a liquidity event (e.g. sell-out, IPO, etc). This profile of business does not match your company. You might be able to find an angel investor, but these types of inventors are "amateurs" and can be very difficult to deal with as they may not be as hands off as you might like, and they can often be nervous investors who are intrusive if things don't go as expected. In both of these cases, you are giving away ownership of the company. In the case of a VC, you are guaranteed to lose control (via board seats) on the first round of funding. In the case of the angel investor, you will be required to give up a board seat and you'll have a forever partial owner of the company.

    Your other option is debt financing, either via lease of equipment, bank loan, etc....in this case you don't give up ownership and control of your company, but you WILL have to service the loan payments, any missed payments and things start going badly quickly. You might be forced to sign off personally on the loan in which case your house and personal assets are at risk. Debt financing is all about being 100% confident of your ability to service the debt "no matter what" happens. If you have risk with your major customer, you put your business at risk if that customer goes away and you can no longer service the debt.

    All business trade-offs, and these decisions are driven by the risk/return trade-offs that only you can judge are worth taking with your business.

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    How much are you looking to borrow? How much interest are your willing to pay? Over what period of time? Apart from voluntarily giving up the machine what other collateral do you own outright and willing to put up to complement the machine being financed. I’m thinking red lines on investor part would be anything less than 3% and obvious collateral they can fairly easily collect without resistance from you that is about twice as valuable. Do you have that and willing to risk that? Like expensive vehicles, land title, building title that is not already leveraged to another?

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    Quote Originally Posted by Punkinhead View Post
    I don't know anything about this personally, but my neighbor just lost his 7 year old business to an investor who called in his loan without any notice.
    Natwest bank did this to quite a few companies in 2008 (during the crash). Companies that were solvent, good order books, yet the bank demanded the overdraft be cleared within less than a week. No time for re-finance from other banks, so companies went pop and the banks took the lot.
    It all went to court, and has been going on for years, and it was only late last year (maybe early this year) that the bastards were found guilty of improper business practices.
    Solicitors made a fortune but it didn't help the old companies though...

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    Quote Originally Posted by midwestmachinist View Post
    My concern with traditional bank financing is making a major investment, and then seeing a downturn in the economy, or losing the customer for an unforeseen reason.
    DingDingDing alarm bells are ringing...
    This tells me that you are NOT comfortable with doing it.
    And it's great to be cautious. Yes, you may hold the company back at times, but you're still around trading and doing well. And protecting your business is #1 in my books. Look after your business, and your business will look after you.

    You seem to have too many eggs with the one customer to go expanding. FullStop.
    If you're at capacity now (proper capacity, 7/24) and need more spindle time, I would look at other routes such as talking with a small local shop and putting some easy (low risk) running work into them to free your spindles for the higher paying work.

    This place (PM) taught me that when expanding, unless you double your factory size, don't do it.
    And also the easiest way of going bankrupt is expanding the business and running out of cashflow.
    As Ron Dennis (owner of McLaren) said when he built his all singing all dancing factory, "if you can't afford two, don't buy one".

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    Sounds to me like you need to make $ with what you got now first. Put in the hours, then the extra hours, and best work flow possible. Make sure its making $$$$ and pay off some current iron before going deeper down the rabbit hole. A slowdown always comes eventually.
    If some jobs aren't work doing maybe cut those off to make room for better work on the equipment you got now.
    1 machine going idle shouldn't put a shop in a life or death situation.

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    Quote Originally Posted by midwestmachinist View Post
    High-tech, multi-turret machine shop utilizing the latest technology from INDEX/TRAUB with a 40 year family background in machining located in the Midwest seeking capital investment. I’m curious if anyone has experience with seeking investors who are interested in these types of businesses? Currently we are at our machining capacity, and have an opportunity to expand our business significantly with an already established customer. We would like to explore options that don’t include traditional bank financing, and would love feedback from the practical machinist community regarding anyone’s experience with trying to use investors for expansion or where to look for investors interested in job shops.

    Your feedback is greatly appreciated.
    I definitely agree with the sentiments in this thread.

    Very cool you have Index Traub equipment ---> Just curious what you have ?

    And just out of interest IF someone threw $100K at you , what would or could they expect in return ?

    I'm just trying to gain clarity on what you imagine here in this kind of scenario.

    Sounds like you need an investment that 'tends" towards $2M ? ish .

    Didn't know if you needed to expand into a new larger building or premises also ?

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    Quote Originally Posted by Aejgx6 View Post
    Ask the customer to invest in the process. They would get a discount for so many years. You would pass the cost of investment on anyway, and it helps lock in a commitment from them. This kinda think happens and is a win win for everyone. You just have to find the right person to get better info from. Maybe a consultant. Probably not something people would want to talk about on the interwebs though.
    This works but get the best legal assistance by all means necessary, the terms need to be defined with exacting precision to satisy both parties.

    Sent from my SM-G973U using Tapatalk

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    Quote Originally Posted by barbter View Post
    This place (PM) taught me that when expanding, unless you double your factory size, don't do it.
    And also the easiest way of going bankrupt is expanding the business and running out of cashflow.
    As Ron Dennis (owner of McLaren) said when he built his all singing all dancing factory, "if you can't afford two, don't buy one".
    Curious about the "double your factory size".

    Is that, don't ease into growth, or don't go bigger than 2x what you have now?...because it seems to be don't ease in to growth, and I'm a bit confused by why you wouldn't want to do that.

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