Once your investment is made, you should begin monitoring its results. There are a variety of reasons for this:
- If you maintain a good relationship with the investee, you can get updates on how things are going with the business. You can share in the successes of the business, and offer help with the challenges. Staying engaged early, when things are going more or less as hoped, helps build a foundation for continued communication and openness should the plans hit a shaky patch.
- If you receive periodic financial statements, you can see how actual business results compare to what you expected during due diligence. This gives you a window into what’s happening at the business and how that can affect your investment. Understanding how business results unfold over time also helps you get better at due diligence.
- If the business runs into trouble, hearing about it in a timely manner will help you mobilize a solution sooner. It’s not necessarily your job to create solutions, but you may have connections, knowledge, or experience that can help. The ability to directly affect your investment in a positive way is a unique aspect of local investing for most people.
- Make sure that the investee is living up to their side of the agreement. You should be receiving payments on time, and in the correct amounts. If you aren’t, reach out to find out what’s going on. Usually, it’s not a big deal, but sometimes this can be an early warning sign.
When things are good with an investment, life is easy, and when an investment gets in trouble, it can be challenging. When a borrower isn’t able to generate the cash flow to make loan payments, they may have to default. Generally speaking, it will be in your best interests to renegotiate a new, more sustainable payment plan that can work for the borrower. This is called “restructuring” the loan. It may involve delaying payments for a period of time, lowering the interest rate, and/or lowering the payment amounts. Restructuring is likely to result in a loan that is less financially attractive for you as an investor. Yet, if the business person is sincere about getting back on track, and their renegotiated obligations are truly workable (which is key), the results will almost certainly be better for you than turning to the legal system. We have observed that business owners and managers are more motivated to make good on their investment agreements with local investors, compared to banks or credit card companies, because they are part of the same community, and often friends and neighbors. This is an important factor that helps lower the risk of local investments in general, and makes the total loss of a local investment relatively rare.