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Thread: Investment or Loan???

  1. #1
    Full Member deetee's Avatar
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    Question Investment or Loan???

    I'm not sure if this goes here or in the Credit Act board, but here goes anyway...

    If I were to invest directly into a business, thereby helping a person to start up their own business, and for my investment receive a share of ownership in the business, I am exposing my money to a certain (possibly large) amount of risk.

    If however, I was to rather purchase the capital equipment in my own (or my own business) name, and "rent" it to the new startup business of the person I was helping, with the proviso that after X period of time (once I have recovered my investment with interest) the ownership would pass to the new business, would my money firstly not be a lot safer (if the equipment remains my property for the duration of the "rental" period.)

    The term "rent" here would surely more appropriately be "lease," but would I then be required to register as a financial services provider??

    How else could I "invest" in a startup business and still achieve a return on my money while still protecting it.

    Any ideas and/or input would be appreciated.



  2. #2
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    Holding the assets as security would probably give you a safe option, depending of course on the resale potential of such equipment. Additionally you will be able to claim the depreciation which helps your tax burden. Depreciating it would mean after 5 years the value is zero, hence you in theory can give the assets to the business. in this way you can probably word it as rental and not a lease, thus getting around that issue.
    Anthony Sterne
    DISCLAIMER The above is merely a comment in discussion form and an open public arena. It does not constitute a legal opinion or professional advice in any manner or form.

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    deetee (30-Mar-10)

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    A lease of movable property constitutes a credit transaction if :
    - temporary possession of the property is given to the consumer, and
    - payment for the possession and use of the property is deferred during the agreement, and
    - interest, fees and charges are payable on the amount deferred, and
    - at the end of the lease agreement, ownership is granted to the consumer.

    The lessor under such a lease is a credit provider and must register if the total value of the lease is over R500 000.

    This question though is more about risk. If the lease is made out to the other business, then that business does not qualify for Chapter 4 Part D of the Act which deals with over-indebtedness. So should something happen, the other business cannot get protection from the NCA to keep the equipment while defaulting on the lease. The Act wouldn't apply.

    Invest or loan?
    Relationships change over time and when things go bad, these issues can get pretty sour. Maintaining investments in separate entities where possible is advisable for the following reasons :
    - each party maintains control of his own investment
    - perceptions or allegations of wastefulness or mismanagement of funds are thus avoided
    - the transaction can be more focused and structured when done between separate entities
    - all of these make adjudication in the event of a dispute easier because there are less grey areas
    - in the event of one business failing, the other investment remains intact and immune from liabibility, as well as still being available to generate reward from productive use elsewhere.

    The cost would be the administrative burden in maintaining an additional entity.

  5. Thank given for this post:

    deetee (04-Apr-10), (05-Apr-10)

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