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For Investors, Return Follows The Perception Of Risk

January 10, 2012 | Comments: 0 | Views: 163

In Brief:

You're keen to know the Investor's terms for a loan. Why they can't give you specifics, only general guidelines for interest rates, time period and conditions or other 'terms'. It's all about their perception of risk.

You're keen to get a commitment from an investor so you can create the great business you have dreamed of. Often the first thing that entrepreneurs want to know is the 'terms' of the investor's commitment: What interest rate will they charge?; How many years to pay back the loan?; and Can I have an interest free period at the start, so that I can take the pressure off my business' cash flow?

A great many entrepreneurs fall into this trap and get frustrated when they can't get a commitment from an investor. What is the reason for this frustration? Genuine investors cannot legally commit themselves to 'Terms', because that is only possible after their due diligence.

Worse still, they may be duped by unscrupulous people who offer them a 'Terms Sheet' very early in the process. The 'Terms Sheet can be the 'bait' used to catch the inexperienced entrepreneur into committing themselves to a scam that is pretending to be an investor. Don't fall into the trap!

However, you may be given a Letter of Intent by genuine investors. That has lots of legal clauses that give the investor an escape route from the commitment. The genuine investor MUST protect themselves with a thorough due diligence. This leads to the investor's risk assessment. The risk assessment dictates the terms you may be offered. The reason is that when it comes to investment it is universally stated that "return follows risk". Which is to say that the higher the rate of return [interest] the higher the risk of the investment.

When you're looking to borrow someone else's money to build your business, you are inviting the lender or investor to rate your business as a "risk" - because the interest rate and terms they want in return for letting you use their money relates to their perception of risk in placing their hard earned cash in your venture.

Whether you like it or not, when you ask someone to invest in your great business you are inviting their judgement of you and your business. This is unavoidable. The investor cannot assess the risk that your business represents until they have completed their due diligence. This critical judgement cannot be done one moment sooner. The reason is that the purpose of due diligence is to discover all the risks, and proof of protection against risks that has been built into the venture.

So be patient. An International Investor can probably give you some guidance about terms, but not a 'terms sheet' until after they have discovered the risk, after your plans and arrangements for the business have been scrutinised by due diligence.

David Z Reynolds is a senior Financing consultant with many years of experience. He has conducted due diligence for Investors in Africa, Asia and Australia. Together with his wife Amanda, he operates GPC Business Plans. They develop business plans that are 'Investor Focused', custom designed to meet, or exceed the investor's due diligence standards. They offer a FREE website with articles that explain many issues that are pertinent to entrepreneurs. The articles explain terms and processes involved in entrepreneurship and developing new businesses. They may be found at

Source: EzineArticles
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