My employer of 5 years is looking to start a side-business that complements our current business. We're a software developer and I'm his lead developer and longest employee. I trust him implicitly, he's a very upright guy who sticks to his morals and I have no issues about working for and with him. We've got a lawyer who will do up all the documents and contracts to make it official.
As a part of this new business, I would be looking to invest around $50,000 and would become the director of the new company. I have no doubt that this new company could cover its initial startup costs in about 12 months.
I have approx. $20,000 cash that I can use. What's your experience in getting the extra $30k? Is that the kind of thing I should be speaking to a business banker about, or do they only deal in much larger numbers? Is a line of credit against my house going to be OK, or are there rules about where the money can come from?
I'm in Australia so I don't know rules or whatnot is different. What are the catches I should be looking for when sourcing the money? Is it advisable to take an unsecured loan or a line of credit for a sum that small?
I'm in Australia too and as far as I know there are no rules about how you source the money as long as it is legal. :)
You may also be able to negotiate something so you don't have to put the whole $50,000 in up front. For instance:
I assume you have been open with your partner about your situation. You should be able to negotiate something to suit both of you.
As Tim commented above, it seems odd that you would need to be considering something as risky as a second mortgage on your primary residence to invest in this startup. It is much more realistic for your business-owner partner to seek a business loan to expand his business with this new spin-off (which could be partially owned by the current company if there was some board or accounting concern that funds should not be used for a completely independent side venture).
For the average worker, acquiring an unsecured personal loan for more than $5-10k is harder than you might expect. If your credit is great and you have a good banking relationship, it's possible here in the US but generally our bankers favor loans of that size for purchases like autos or real estate. It's harder to get a loan of that size to fund a startup simply because most working class and professional Americans simply have too much debt and their income-to-debt ratios and payment histories are often too sketchy. This may not be the case for you, and the whole banking climate may be different in Australia, but I would guess it is still more realistic for an established profitable business to get a $30k loan for expansion than it would be for a first-time entrepreneur who is investing their max cash to get that much more on an unsecured personal loan.
The best advice is probably to make sure you can afford to lose everything you're investing. You may be totally confident that you'll succeed, but you wouldn't be the first startup to feel that way and then face some ugly unexpected setbacks later. Tying so much to your personal debt and even your primary home seems very risky to me. Your partner should also be keen on limiting his personal liability and structuring this through his existing company as much as possible, imo.
After reading Kelly's and Susan's answers, I tend to agree in part with both of them. There are things I've looked at in some of my ventures when I didn't have all the capital up front, which included a pre-negotiated sweat-to-cash contract that stated for every 1h of work I put in to the company, it was worth XX amount of dollars in investments towards the company. After all, time is never free!
The bigger picture view though comes from the challenge of whether or not you really need that money all up front. Leasing equipment or buying second-hand should be a strongly considered option when you're talking prices in the range of $100k. A common oversight for people starting new businesses is that long-term savings NEVER keep a company afloat. It's your monthly net revenue that determines the success of your business. The only exception may be property development - everything else lives and dies by monthly net revenue MNR [disclaimer: this is my personal bias based on years of experience and observation].
If you're going to take a loan out to cover that remaining investment, you'll begin monthly payments right away. Why take that personal liability on by yourself? If the company is successful, lease your needs and redistribute that liability onto the company, which is then shared by you and your partner. You can still split the monthly expenses 50/50, and keep the initial capital investment you were originally thinking (though I still maintain that you should define a value for your time as an investment). If your business allows you to cover whatever personal loans you were thinking of, it can surely cover leasing...
In the end, keeping as much of the liability on the corp rather than your personal self is always preferred. Another option is to convince your partner to have the company take out a loan which you both equally secure. This way, again, you keep the credit in the company's name, but use a portion of your personal assets as investments for loan security. WARNING: this is a bad practice, and outside of real estate, most people will tell you that taking out big loans to get started should be avoided as much as possible.
Focus on your MNR, and forget whether it will cost more in 5 years. What's that saying? "A dollar today is worth two tomorrow." (source forgotten).