For investors, return follows perception of risk
You are interested in knowing the investor’s conditions for a loan. Why can’t they give you details, just general guidelines for interest rates, time period, and conditions or other ‘terms’. It’s about your perception of risk.
You are interested in getting an investor commitment so you can create the great business you’ve dreamed of. Often the first thing entrepreneurs want to know is the ‘terms’ of the investor’s commitment: What interest rate will they charge? How many years to repay the loan? y Can I have an interest-free period at the beginning so that I can ease the pressure on my business cash flow?
Many entrepreneurs fall into this trap and become frustrated when they cannot get an investor commitment. What is the reason for this frustration? Genuine investors cannot legally commit to the ‘Terms’, because that is only possible after their due diligence.
Worse still, they can be fooled by unscrupulous people offering them a ‘Term Sheet’ very early in the process. The ‘Term Sheet’ can be the ‘bait’ used to catch the inexperienced entrepreneur and get him to commit to a scam pretending to be an investor. Do not fall in the trap!
However, genuine investors may provide you with a letter of intent. That has many legal clauses that give the investor an escape route from compromise. The genuine investor MUST protect themselves with due diligence. This leads to the investor’s risk assessment. The risk assessment dictates the terms that can be offered to you. The reason is that when it comes to investing, it is universally stated that “return follows risk.” That is, the higher the rate of return [interest] the higher the investment risk.
When you are looking to borrow someone else’s money to build your business, you are inviting the lender or investor to rate your business as a “risk”, because the interest rate and terms they want in exchange for allowing you to use their money are related. with their perception of risk in putting hard-earned money into their business.
Like it or not, when you ask someone to invest in your big business, you are inviting them to judge you and your business. This is unavoidable. The investor cannot assess the risk his business represents until he has completed his due diligence. This critical judgment cannot be made even a moment before. The reason is that the purpose of due diligence is to uncover all risks and proof of protection against risks that has been incorporated into the business.
Be patient. An international investor can probably provide you with some guidance on the terms, but not a ‘term sheet’ until you have discovered the risk, after your plans and arrangements for the business have been scrutinized with due diligence.