Is this idea stupid / large risk with small reward?
Have about $150k sitting in a slush fund. Just invested in an index.
Was thinking of taking 100 of it and starting a small “fund” (hold your laughter). That does 5-10k loans. Basically thinking underwrite, derisk by selling the loan, taking bps of spread, redeploy the capital. Will be for something ‘backed’ aka contracted revenue, assets, etc. Was also considering using a bit of the cash for small venture debt deals. Yes, will bake in OID, NC, etc. to protect and have lawyers I’ve used in the past.
Know this isn’t a ‘yea I’ll just sit back and collects my monies’ and that the size is laughable, but it’s always interested me and can’t stand the loan sites that cross seekers / funders as all the good deals dry up and fees / lockups are absurd.
Anyone try something like this?
Anyone?
The actual hassles of the lending business make it much less desireable than it seems. I interned at a small senior secured lender and while the idea seems great, it’s just not the most fun job to do below the principle level. Tons of legal hassles, deal work, due dilligence, etc. Also a ton of people try to borrow in shady ways and will lie/ try to hide info that can really wastes time or cause blow ups. Then even one blow up can destroy the fund returns. Also the only reason to set up a fund is if you want to build audited returns so you can start raising aum after building a track record, and even then have fun raising capital. Your best best will be advisors or HNW individuals, pensions and institutional money won’t touch your fund. Also don’t forget about servicing fees on your debt.
Understand that and appreciate the response. I think this wasn’t to launch a full blown fund. That’s a pipe dream. The idea would be to provide loans to small businesses, people with won small claims in cash flow limbo, etc. not trying to lend to someone random off the street without any concrete sources/uses of funds let along ability to actually repay.
Will admit that it isn’t easy at all and likely a lot of headache. This would be more out of interest and launching a small operation than marketing to get broad scale/eat all my time and resources.
Even without launching a full-blown fund, I think the actual deal work and servicing efforts are still going to eat up more time than you realize. Also, even with proof of funds, and other due diligence, there are still a lot of ways people pull a wool over your eyes... Also, another challenge is actually originating the deals. Finding these deals can be hard. This could work, and is a good idea, as there are funds doing this successfully like the one I worked for, but fair warning, I think you are getting yourself into a little bit more of a hassle/risk than you are accounting for and probably want.
This is pretty astute - one blown up loan where you have no recourse / can’t collect will totally destroy your returns
Who is going to buy your $5-10k loans?
Thinking about it either as a small basket or taking out a loan with a lower rate if available (likely talking bps or pips here if anything)
Tony soprano over 'ere
That made me laugh
OP needs to plan on a bust-out of the local outdoor sporting goods store
How does your fund differentiates itself from a commercial bank?
Dumb idea. Instead write 2 angel cheques into some businesses doing ~$2m - $5m and help operationally.
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