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Debt, venture capital and income potential Debt, venture capital and income potential
by Joseph Gatt
2020-12-21 12:04:44
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If someone in my current neighborhood came up to me and said: “I'm going to open a two-story Starbucks-like café with comfortable furniture, Wi-Fi access, and a range of coffee and snack products on the menu, ranging from cappuccinos to frapuccinos to lattes to different coffee products, cakes and cold sandwiches.” And he or she would say something like “my target client base is the business community around us, because I noticed a lot of business gets done at the kebab place by default, so I want them to come to the café, get more comfortable, and know they can discuss business where no one is listening or behaving awkwardly. Then my other client base is the girls who have nowhere to go to chat with their girlfriends about boys and daddy issues, so I'm making it super clean so they can feel comfortable sitting.”

money0001_400So this guy or girl could go to the bank and file a loan application, let's say for 50,000 bucks to purchase the furniture, equipment, construction work, and the first year of rent (in most cases you pay the first year of rent up-front in Algeria).

But there are alternative financing options that many don't consider. For example, the guy or girl could try to raise venture capital, let's say try to find ten people who will loan him 5,000 bucks each. And then he will promise to pay them back 55 bucks each every month, 50 being the loan repayment and 5 bucks being the interest payment. And the guy will be paying the crew 55 bucks each over 100 months (that's around 8-9 years), and after 8-9 years the guy will no longer owe cash. Of course, depending on the success of the business, the guy could jack up the repayments to 110 bucks a month, or try to renegotiate the monthly payments to 35 bucks a months until the business cycle improves.

Venture capital is not just about getting a steady source of revenue for people who loan the money. It's about helping younger (or older) people start small (or a little bigger) projects that they are convinced have good income potential and are a necessity for the community.

The café, for my money, has good income potential, and is a necessity in a community where girls and businessmen have absolutely nowhere to go but the kebab place. Problem is, 6 months ago, the cheap kebab place became a pricy fish restaurant, probably because the owner realized businessmen and girls would keep coming regardless of how expensive the food on the plate might be.

But, over the last 20-30 years, there are a lot of folks in the venture capital world who are willing to loan cash, and who are convinced the cash will be repaid. Problem is: when the entrepreneur introduces his or her business idea, the venture capitalist falls asleep during the boring, verbose, tedious Power Point presentation. The lender has no idea what the entrepreneur is talking about, and does not try to picture what the project is about. Facebook and Apple worked, and so will this project, lenders tend to assume.

From a psychological perspective, this form of lending business (one where the lender does not examine the project and is just loaning money for the sake of making money) can cause huge, huge problems both to lenders and to entrepreneurs.

From the lender's perspective, when they loan money for the sake of making money, if the payments don't come in on time, they get rapacious and bestial. From the borrower's perspective, this can be incredibly frustrating, because the lenders did not listen to the business idea in the first place, and won't listen to the '”excuses” as to why the project isn't going as planned.

From a lender's perspective, I'd say a lender must do two things. First, the lender must study the project carefully to try to evaluate the income potential.

If the lenders study the projects carefully, they will get better project plans. If the lenders have this habit (which they have) of not listening to projects and not caring what the projects are about, the borrowers will in many cases be very superficial in the way they imagine their projects and formulate them.

Second thing the lender should do: always ask the borrower what plan B is for income potential, what plan C is, and what plan D is. Perhaps even plan E.

If the borrower can't imagine a plan B, loaning that money is going to be very risky. The more alternatives for income sources the borrower has, the better.

So if the café does not work, perhaps the owner will tell the lender something like “I'll try my luck with a simple comic book and book café.” If the book café idea does not work, then perhaps transform the place into a nargile house. If the nargile thing does not work, perhaps try to make it a snack bar. If the snack bar thing does not work, maybe try to switch the business model into a business and small conference center where people make reservations and hold their business meetings.

You get the idea. If you're lending money, you want to examine the project. You also want to see whether the guy or girl knows what to do in order to make income if things don't go as planned.

But, the bottom line is, when you loan money, the idea is of course to make money plus interest rates. But loaning money is also a form of activism. In this case it's providing businessmen and women a clean, safe, nice place to hang out over the kind of coffee that is hard to find anywhere else. In either case, if you're loaning money, it should be for the benefit of the community.

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