Sojourner
Thinks s/he gets paid by the post
- Joined
- Jan 8, 2012
- Messages
- 2,603
Kind of a long-winded story, so here's the TL; DR for those who just want the gist of it: Under what circumstances would you consider co-signing a loan for a small, local business run by a few people you recently met (and like), who seem smart, driven, and pretty savvy, but where the business itself is somewhat marginal from a financial standpoint?
Several days ago, I was asked by a few people whom I've recently come to know and like if I'd be interested in working with them on a part-time basis to improve their IT infrastructure and handle other technology-related aspects of their small startup business (a wholesale distribution company). During the same conversation, they asked if I might consider co-signing a loan for $35,000 to help them grow and operate the business. They mentioned that they'd be willing to give up some equity in the company in return for my services, i.e., for doing the IT work and co-signing the loan.
After listening very carefully to their pitch and asking a bunch of questions about the business and their finances, I told them I'd certainly be willing to do some part-time IT work for them. The kind of stuff they need would be pretty easy for me to accomplish and might be kind of fun, actually. And I'd love to help these guys succeed, since they seem like great people and we get along really well.
As for the loan, though, my initial reaction was a combination of surprise, confusion, and reluctance. I understood that they were offering a percentage of equity in the business, but I was having trouble making sense of the risk/reward calculation. Given that it's a small start-up company with only 3 employees and they don't have a solid, reliable, growing base of suppliers and retailers (they are working to build these up, obviously), I feel like there are pretty substantial risks involved in co-signing a sizable loan. An obvious example would be, what if one or more of the 3 people (all of whom are vital to the business) were to leave or get hit by a bus or somehow drop out of the picture? This would almost certainly result in a major decline in revenue, leading to a possible default on the loan, and then I could be left holding the bag.
So, I'm struggling to figure out why I would co-sign such a loan. Let's say they gave me 5% of the business in return for the loan assistance and being their IT consultant. If they were a promising little high-tech or Internet startup, I would say "Well, 5% might be worth a boatload in 3 or 4 years if they end up getting acquired." But in this case–with a small, brick-and-mortar, importer/distributor company–I don't see that sort of potential payoff. Maybe it ends up generating some trickle of cash down the line if the company's profits grow substantially, but for me, that's a fairly marginal reward in return for the nontrivial risk I'd be taking on as co-signer of a large loan.
I'd appreciate any thoughts, suggestions, feedback or words of wisdom on this situation. I'd especially be interested to know under what circumstances, specifically, you'd be willing to co-sign such a loan. Are there specific criteria you'd apply, such that only once all those criteria were met, you'd go ahead with it?
Several days ago, I was asked by a few people whom I've recently come to know and like if I'd be interested in working with them on a part-time basis to improve their IT infrastructure and handle other technology-related aspects of their small startup business (a wholesale distribution company). During the same conversation, they asked if I might consider co-signing a loan for $35,000 to help them grow and operate the business. They mentioned that they'd be willing to give up some equity in the company in return for my services, i.e., for doing the IT work and co-signing the loan.
After listening very carefully to their pitch and asking a bunch of questions about the business and their finances, I told them I'd certainly be willing to do some part-time IT work for them. The kind of stuff they need would be pretty easy for me to accomplish and might be kind of fun, actually. And I'd love to help these guys succeed, since they seem like great people and we get along really well.
As for the loan, though, my initial reaction was a combination of surprise, confusion, and reluctance. I understood that they were offering a percentage of equity in the business, but I was having trouble making sense of the risk/reward calculation. Given that it's a small start-up company with only 3 employees and they don't have a solid, reliable, growing base of suppliers and retailers (they are working to build these up, obviously), I feel like there are pretty substantial risks involved in co-signing a sizable loan. An obvious example would be, what if one or more of the 3 people (all of whom are vital to the business) were to leave or get hit by a bus or somehow drop out of the picture? This would almost certainly result in a major decline in revenue, leading to a possible default on the loan, and then I could be left holding the bag.
So, I'm struggling to figure out why I would co-sign such a loan. Let's say they gave me 5% of the business in return for the loan assistance and being their IT consultant. If they were a promising little high-tech or Internet startup, I would say "Well, 5% might be worth a boatload in 3 or 4 years if they end up getting acquired." But in this case–with a small, brick-and-mortar, importer/distributor company–I don't see that sort of potential payoff. Maybe it ends up generating some trickle of cash down the line if the company's profits grow substantially, but for me, that's a fairly marginal reward in return for the nontrivial risk I'd be taking on as co-signer of a large loan.
I'd appreciate any thoughts, suggestions, feedback or words of wisdom on this situation. I'd especially be interested to know under what circumstances, specifically, you'd be willing to co-sign such a loan. Are there specific criteria you'd apply, such that only once all those criteria were met, you'd go ahead with it?
