Monday, August 9, 2010

Introducing Soft Loans - A new corporate security

Natural Finance uses Queued Capped Soft Loans.  This is first of 3 part post series.  This is meant as a concept introducing post, but the official statring point is here .

Purpose Holders of a traditional corporation are its shareholders.  Management has a duty to maximize shareholder value.  The Founder of a corporation typically conceptualizes and executes its function through management of it, but if he needs more money than he is able/willing to risk, he must, most commonly, negotiate away much if not most of the purpose-holding to stock investors.  If it is most of the purpose-holding, then he completely loses control of his concept and mission for it.  If it is less than most, then stockholders are helpless captives to nearly every management whim.

Soft loans are loans with no fixed date/amount repayment terms, but rather based on ability to pay.  They are similar to royalty streams with the major exception that they expire as soon as all of the principal and interest is repaid.  They are much more similar to interest accruing accounts payable, or a promise to suppliers to pay them when some sales are made.  Soft loans are transferable the same way any lender could assign your borrowing obligations to be paid to someone else.

From an investor perspective, a soft loan must have tight accounting controls that prevent the borrower from interpreting or managing his "ability to repay" obligation.  The lender never wants to have to call and request for payment time frames.  These trust issues explain why soft loans have traditionally been unpopular for lenders. When trust is verified, soft loans are much less risky than owning minority stock.

The capitalists role is to get a return of and on his capital.  The most direct way is through loan interest.  His role is not to interfere in how to provide that return, or demand and delude himself into promises of unlimited returns on his capital

Queued Soft Loans have significant advantages to both minority stock or bonds/traditional debt to investors (details comming).  soft loans share bond-loans predictability of repayment.  While bond predictability is affected by likelihood of default projections, soft loans are not only necessarily less likely to default (details comming), but have an expected date of repayment, which usually, even when it misses expectations does not affect the return to investors.  Stock returns have no tangible predictability.

From management's/purpose-holder perspective, soft loans have the same benefit as share capital in that you never have to consider paying them back unless you are able to, and the advantage over bond-loans that you are never forced to pay unless you are able to.  When trust is verified for stakeholders, and controls on management spending and salaries in place, soft loans become an enterprise currency, where suppliers, customers, and employees can be provided with assets with much more tangible value than stocks or options.  Tangible value that is much less affected by unknowable management possessed information and competencies.

Part 2 Queued Soft Loans

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