By Lyndsie Barrie
Of course you want to be a bank. Maybe you don’t want to be your cousin’s bank because he still lives in his mommy’s basement at age 35, but believe me, you want to be a bank in other specific situations. If being a bank doesn’t sound appealing to you, I suspect you don’t realize how much banks profit. Banks have towers in the sky while most people live payday to payday.
There are types of ‘non-traditional’ debt investments which are often referred to as ‘mezzanine’ or ‘bridge’ lending. These short-term loans (usually 6-18 months) are sought out by companies experiencing cash flow timing issues and look to pools of investors who want to be a bank to help them out of a bind.
Here is a simple example. Shine Shampoo Inc. has just received a $500,000 shampoo order which will cost $250,000 to fulfill. That’s $250,000 profit on this one order! The problem is, Shine Shampoo needs the initial capital to make, package and ship the shampoo, which they don’t have. They’re a small company, and this is the largest order they’ve ever received. If they don’t fulfill the order on time, they will lose their contract with this drug store chain. Since banks are often slow when it comes to lending money and won’t lend if you don’t check all the boxes on their list of criteria, Shine Shampoo’s owner seeks out a company which specializes in situations like this: Taylor Capital Corp.
Shine’s owner works directly with the lending team at Taylor Capital, and just one week later, Taylor Capital has approved the loan on a six-month contract at 15% interest. Taylor Capital isn’t just a bank, it’s also an investment fund, which now owns another loan. Based on the terms of the contract with Shine Shampoo Inc., Taylor Capital’s investors will earn approximately 9% and Shine has successfully expanded its business. Shine’s owner doesn’t mind reducing her 100% profit to 85%, since it means landing a great new customer. Besides, she won’t have cash flow issues like this again…
Or will she? Here’s another way bridge loans can alleviate cash flow timing issues: Shine Shampoo fulfills the order and is now waiting to be paid from the drug store. The contract states the invoice must be paid within ninety days of fulfillment. Shine Shampoo’s owner is really hoping the drug store doesn’t wait until day ninety to pay, but this has happened to her before.
In the meantime, Shine receives an even larger order from a different drug store chain. If Shine can pull off Big Order #2, it will mean $500,000 in profit!!! Shine’s owner goes back to Taylor Capital and presents her issue. Taylor’s team checks out the invoice for Big Order #1, which is due to be paid in sixty days or less. After Taylor’s team carefully researches the ability of both drug store companies to pay for their orders, and other important financial matters which I won’t pretend to know about, they agree to loan Shine more money. Except this time, it’s actually two separate transactions. In the first transaction, Taylor Capital agrees to purchase invoice #1 from Shine and wait to be paid. The drug store will pay the money owed directly to Taylor. Taylor will pay 85% of the profit to Shine and keep 15%. The second transaction is another bridge loan like the first example.
Imagine an investment similar to a mutual fund (pool of investors money invested in stocks and bonds), where the investments inside aren’t stocks and bonds; they are privately negotiated loans and you are the bank.
These types of investments actually exist! Exciting, right?!?! It’s all legit and helps our economy by propping up businesses when they need it most. And those of us who do the ‘propping up’ ideally get paid back like a bank (no guarantees, of course). These transactions are going on all around us constantly, and I suspect you will be excited to find out there are ways for Canadians to take part in such transactions.
The Shine Shampoo story highlights why I’m so excited about investing: I love being a part of a company’s growth and sharing these opportunities with others. Being a bank for a handful of businesses can provide passive income and add income streams to your core income. Adding more and more income streams to the core income is an important part of investment diversification.
Speaking of diversifying one’s income stream, the ‘Shine Shampoo’ story is an example of one of the many things I do for a living: I help business owners in a pinch find investors to help them grow their businesses which provide new income streams for my clients. Remember that with ALL investing, there are no guarantees that you’ll profit and you could lose all the money you invest.
Lyndsie Barrie is a Financial Consultant specializing in serving people at any net worth level. In January 2017, she published her first book, called 39 Keys to Money Success for The 39 Forever Mom.