I have been following posts on this website for several weeks. I am retired from private investing (28 years) and I feel it is necessary to speak to several areas of concern.
First, private money usually will not fund business less than $150,000 and in most cases more. The reason is that the funder incurs time and expenses. It is not profitable enough. If you are seeking money in any amount or less than that I suggest going to friends and family.
Second, a big turn off is identifying yourself as having credit problems, using the funds to bring current your mortgage or to pay yourself a salary. Investors will invest in the business not you. Yes, you are important and an integral part of the business, but your bio should reflect that.
Third, the current economic environment has traditional lending sources reducing credit lines, not renewing notes, and lowering credit limits on credit cards. Again, if you seeking small dollars do not contact private money individuals, but look into factoring accounts receivable, purchase order funding, or even merchant advances.
Fourth, if you are able to attract private money be prepared for high rates and fees. Unlike traditional lending sources, private money is just that..private money, and is at risk. Risk carries a heavy price.
Fifth, Fees! The two types of fees to be concerned of are Broker Fees and Investor Fees.
Broker Fees are those fees in which a third party charges a fee for finding a lending/investment source. These fees are usually accompanied by a best efforts contract. I was recently asked to review an intermediary's contract. This contract contained a due diligence fee of $12,000 of which $5,000 was due at execution of the agreement. As well as a 5% finder's fee and 10% of the companies profits.
I think you know what my advice was.
Investor Fees are those fees that the investor of private money charges, most times called due diligence. This fee is to defer the cost of conducting an investigation of the business and principals, as well as analyzing the market, marketing strategies, historic financials and forward looking information. These fees are real and necessary. Yes, some people may pretend to be investors, so do your homework and check them out. Do not ask for references! Private money is just that..private money. Would anyone provide a bad reference? Do not ask for "closed deals" most of them are protected by NDA and exposing that information could lead to legal problems. Do go the Attorney Generals Office and search for complaints, use the BBB, and by all means use the internet.
In conclusion, fees are necessary in private money and usually represent value. Be sure you know what you are doing before you send anyone any money!