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Private Funding for My Business
Hi, I was recently offered from a client/friend a generous amount of capital for the next 5 years at a great rate to invest. These funds will primarily be used at my discretion for acquisitions as I scale my business. I currently have a successful real estate investment business that is essentially a portfolio of STR/LTR rentals that I hold under my LLC. The LLC consist of just my wife and I owning 50% , and my 2 children as 25% each. What is the best way to write up the paper for this debt, would it just be unsecured debt, how could I secure it without changing the ownership structure of the LLC?
@Jon Robinson well you could certainly do it as unsecured debt. I wouldn't loan to you under those terms but someone might.
If you have any real estate that can be pledged as collateral. I believe that can be done even if the real estate is not owned by the LLC as long as you as the owner agree to use it as collateral. Also personal property can be secured but using a UCC filing (Uniform Commercial Code).
You certainly need a lawyer to write any documents.
@Ned Carey Thank you for your response, while there are thousands of companies and individuals out there that so make unsecured loans everyday, my question wasn't specifically directed to you. As for securing the loan, it would be listed as debt in my business so how would that be any different than getting an unsecured loan, line of credit or a credit card from a traditional bank. I was thinking more so on the lines of creating a note that can be sold if need be in the future. Kinda like a template that can be used in the future when I decide to take on more investors who are looking for passive income from their money.
@Jon Robinson
"As for securing the loan, it would be listed as debt in my business so how would that be any different than getting an unsecured loan, line of credit or a credit card from a traditional bank."
It is not any different.
"I was thinking more so on the lines of creating a note that can be sold if need be in the future."
Your question doesn't make sense. You cannot sell a note you owe. The holder of the note (the person you owe) can sell the note. If the holder of the notes sells the note, it does not affect you.
@Ned Carey Again thank you for commenting, I am aware that I cannot sell the note, it is a statement not a question selling a note that I am paying on, my question is from the standpoint of my investor and how to strengthen the value of the note. This will be part of his estate and just wants it to have a fairly easy way to liquidate if need be. Again I thank you for answering and but please if you have no positive input please refrain from commenting again. Thank you.
Quote from @Jon Robinson:
Hi, I was recently offered from a client/friend a generous amount of capital for the next 5 years at a great rate to invest. These funds will primarily be used at my discretion for acquisitions as I scale my business. I currently have a successful real estate investment business that is essentially a portfolio of STR/LTR rentals that I hold under my LLC. The LLC consist of just my wife and I owning 50% , and my 2 children as 25% each. What is the best way to write up the paper for this debt, would it just be unsecured debt, how could I secure it without changing the ownership structure of the LLC?
Hi@Jon Robinson, I've run into this myself. Good fences build good neighbors, so definitely have a strong agreement in place. You can have an attorney "paper it" (draft the agreement), but that will cost a pretty penny or you can roll the dice and do it on Law Depot or something like that. That's risky, but I'll leave that up to you. As for securing it, you could always do one of two things: 1) Hold all the assets in the LLC and then provide your lender a UCC against the LLC...meaning they are getting the LLC as security. The UCC filing creates a lien against the LLC, not the properties in the LLC. If the assets are in the LLC and they have the LLC as security, then they vicariously can act against the LLC without transferring title. 2) Create a new LLC owned by your LLC that acts as a real estate holding company for all of the assets that will be used from that money then do a UCC against that LLC. Your agreement can state that, until the debt is paid, you have to hold those properties in that LLC name. You should also probably define withdrawals and what you are and are not allowed to do. Those are just a couple of ideas, but there are an infinite number of ways you can do it. I do hope that helps and in some way answers your question. Good luck!
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Quote from @Jon Robinson:
Hi, I was recently offered from a client/friend a generous amount of capital for the next 5 years at a great rate to invest. These funds will primarily be used at my discretion for acquisitions as I scale my business. I currently have a successful real estate investment business that is essentially a portfolio of STR/LTR rentals that I hold under my LLC. The LLC consist of just my wife and I owning 50% , and my 2 children as 25% each. What is the best way to write up the paper for this debt, would it just be unsecured debt, how could I secure it without changing the ownership structure of the LLC?
You could do a portfolio loan against all the properties or a business loan where they file a UCC lien.
@Doug Smith thank you, this was very helpful.
@Jon Robinson
You don't need to do anything to change the "the ownership structure" of your LLC. As long as the other members of the LLC go along with the loan. Your LLC operating agreement should specify who and how things like loans are voted on.
Regarding making the Note more valuable to your lender, absolutely it should be a secured loan. A note secured by a UCC filing is probably not as saleable as a mortgage note. Fewer people are familiar with UCC filings, while mortgages are actively sought in the secondary market. The more collateral the better. The collateral should have more value than the face value of the note. In addition to collateral having the note personally guaranteed makes it more valuable, lastly a record of timely payments makes it more saleable.
If you lender wants to sell the note after two months, he or she has little payment history. Once a note is "Seasoned" for a year or two then it becomes easier to sell.
"but please if you have no positive input please refrain from commenting again."
I am not sure why you think I have not provided any positive comment. I have answered your questions. If you don't make yourself clear with your questions then it is hard for people to understand what perspective you are coming from. I also answer questions not just for your benefit but for others reading along.