In this article, we will take a close look at the online investment market and explore the key aspects of debt and equity investments, the most popular investment types.
What you will learn:
What is the difference between debt and equity?
Let’s assume you finally decided to make a move towards starting your online investment business.
You did your homework and chose real estate as a niche. Now you need to think of the rails to put your idea on – a business model.
Before you go all in, we would like to explain what the difference between debt and equity investment is.
Asset allocation and the difference between debt and equity
When compiling a portfolio of assets, one must go through the basics to decide how to balance between risk and returns.
Depending on the risk tolerance of investors, RIAs suggest a strategy to employ when planning for the future.
You may wonder which of the equity vs. debt investment is right for you.
Let’s get this show on the road and explore each of the investment vehicles, weigh their pros and cons, so you can choose what kind of security and style suit your risk profile the most.
Debt investment vs. equity investment
First of all, the majority of the assets can be split into two main types with investors choosing between debt vs. equity investment categories.
You don’t have to run to an independent financial advisor to get a basic understanding of the difference between debt and equity, though.
Let’s dig a little deeper into comparisons and lay it all out.
Debt vs. equity investing statistics (we love numbers)
It’s hard to say who’s the boss — debt vs. equity investing.
The entire crowdfunding industry prospers with debt and equity financing volumes at their height.
In 2018, the European crowdfunding market reached more than 18 billion euros.
No wonder that in terms of European countries in 2018, the United Kingdom was the leader of crowdfunding. Just look at Crowdcube, Seedrs and LendInvest’s performance statistics.
It’s not without the FCA and its policy on alternative lenders activities. Investors here feel more protected and don’t sweat it about the monies.
Statista says that equity and debt-based crowdfunding are the most popular in the EU, and somehow doesn’t add P2P loans to this list.
But we know the truth: in 2018, the volume of P2P and P2B loans amounted to $2.9B.
From the chart, you can see that Real estate alternative financing has grabbed the largest piece of the pie.
Deals that even 10 years ago where a prerogative of incumbents, now are closed without traditional middlemen.
A half of experts predict an increase in debt funding for RE investments coming from alternative lending platforms and non-banks.
The difference between debt and equity financing (P2P) worldwide highlights the gaps in P2P crowdfunding adoption among the world’s regions. Europe is a frontrunner in terms of the number of available platforms and crowdfunding volumes.
What is a debt investment?
To unveil the mystery behind debt investment vs. equity investment, we will begin with the debt-based investments.
This type of investment strategy is believed to be more secure and bear the lower risk and returns long term.
Think of a debt financing as of providing the company in need with a loan, for example.
Your gains are not directly based on the profitability of the company borrowing money from you.
Even though this kind of investment may seem perfect for investors with moderate appetites, debt funding has creeping inflation as a factor that can be quite disappointing.
Let’s assume you decided to keep your money for five years.
They promised you a return of 10%, but the inflation was galloping at the rate of 15% for the five years you kept your savings there.
It means your initial capital depreciates faster than it generates more money for you: you are slimming down by 5% each year.
Options for debt investment
Debt security or Corporate Bonds: despite the reason or need for financing, some companies issue bonds to raise money to cover the funding of some of their operations, future acquisition of a smaller company etc.
Government Bond is about is another debt security but issued by the government that accepts a loan from the public to get the funds for financing varied activities or projects.
Insured by Federal Deposit Insurance Corporation in the US, for example, a CD is short for Certificate of Deposit which is issued by commercial banks and credit unions that allows customer earn a return on investments but only after a certain period. Before that date, investors do not have access to that money. Think of CDs as of piggy bank that you cannot take a penny from unless it’s broken.
Annuities concern a single payment made at a certain period to generate stable returns every month coming during the whole life or particular period.
With investments not backed by any insurer or guaranteed by some third-party, annuities can be either immediate or deferred with income streaming at the moment or some point in the future.
Municipal Bonds are among debt instruments that issued at different administration levels from state t country. By buying a “muni bond, investors loan the money at specific interest allowing companies financing their CapEx.
Savings Accounts allow investors to accumulate interest on a balance of money kept in a bank.
Among all the debt investments, savings accounts offer one of the lowest return.
Pros of debt investment
Debt investments are usually not that risky, and debt investor vs. equity investor is likely to get lower but more consistent gains.
Alternatively, these instruments are less prone to market fluctuations than ETFs, for instance.
Even if a company you gave a loan will file bankruptcy, you’ll be the first in the queue to be paid back.
Loans require a company borrowing funds to offer some guarantees known as collateral that they will repay the debt.
Cons of debt investment
When you go for debt investment, unlike with equity scenario, you get no ownership and the right to control the business borrowing money from you.
The moment this firm pays off the debt, you need to think of another source of generating income and weighing investment options again in case it happens earlier than you expected.
Then again, if the borrower company happens to prosper, you have nothing to do with the profits it makes: your participation in this firm’s life is limited only by the bonds of the loan you offered.
Top debt-based crowdfunding platforms
To better understand the difference between equity and debt finance, let’s have a look at business models of leading crowdfunding companies.
Lending Club is a leading provider of personal loans for credible borrowers with a good reputation.
Since 2007, the platform has generated more than $35.9B in loans which are typically aimed at paying off debts or refinancing mortgages.
Lending Club has its own system of grades assigned to each borrower which influences investors’ decision on whether or not to support a project.
Being one of the industry pioneers, Prosper is designed for clients with substantial debt needs.
Prosper offers loans for any purpose; however, debt consolidation is one of the most common fundraising purposes.
The annual percentage rate varies between 6.95% and 35.99%. The origination fee is somewhere between 2.4% and 5%.
Prosper selects borrowers only with 640+ credit score and a minimum of two years of credit history.
The motto of Funding Circle is “Take Your Business Further.
By offering quick alternative financing, the company has already helped more than 52K businesses to finance their goals.
The factual info about Funding Circle:
- average loan size – £10k – £500K;
- average loan period – 6 months – 5 years;
- 5 hours for processing a borrower’s application;
- annual return rates – 1.9%.
Popular reasons to raise funds via the platform include purchasing new equipment, growing business, refurbishing premises, and hiring staff.
What is an equity investment?
Going on with the difference between equity and debt investments, we need to define the second option first.
If you decide to go for an equity investment, you invest in an asset and rip the fruit that grows in direct proportion to the actual performance of that asset you hold.
So if you have stakes in a pet salon, your potential of getting rich will depend on the net sales of services the salon generates.
In case you’re more of a tech geek, you can choose to rely on a potentially booming market.
Therefore, if you prefer purchasing a couple of Facebook shares while Mark Zuckerberg is explaining that “we run ads, your venture would be profitable depending on the dividends all those who chip in getting when the value of the share goes up or down.
Options for equity investment
Shares or stocks are the most popular way of instruments by buying a piece of a high-profile or promising business, for example, a blazing hot niche of medical marijuana startups.
It’s a kind of security with a secured claim on a fraction of the company’s sales and assets.
Mutual Funds is another equity investment scheme where the eggs you put in a basket are handled by a professional whose remuneration is based on the performance of assets he is entitled to manage.
Generally, the money is pooled from multiple investors to distribute it across many different investment classes further.
Real Estate investment is about buying ownership interests and later making a profit by, e.g. renting out your property to someone who’d pay the rent.
Real Estate Investment Trusts (REITs): if the former option is more about retail market, REITs concerns commercial properties mostly or whole residential buildings at large.
From offices to warehouses, Real Estate Investment Trusts operate some different income-generating properties allowing their clients to invest in the profitable real estate.
Emerging businesses need funding, and they source money from early fans of their product or service.
If you’re an early bird ready to take a risk and support a startup, it might be the risk worth taking.
Pros of equity investment
The beauty of equity investment is it generates higher returns in the long run so that you can become a wealthy man after years of trading on the stock exchange.
If you plan it well or get someone to help you with the investment strategy, you can find the right ratio of stocks to keep.
To top it off, by investing in some firm, investors become shareholders.
Therefore, the latter have their slice of the ownership and can take part in managing the company’s operations being it a direct control or more of a silent partner style.
If you’re lucky, the company can issue additional shares for free.
It happens when you grow your potential to increase the gains by merely owning these bonus shares and hoping that the company would do roaring trading.
Cons of equity investment
Every rose has its thorn, so does a strategy of putting your money, e.g. into stocks or funding an emerging business.
Usually, higher gains are possible in case you come to terms with the fact that you can lose all your money: more substantial returns are possible at higher risks.
The dividend that shareholders usually receive cannot be predicted or controlled.
Also, the C-suite executives decide on the number of gains to be distributed among the shareholders to keep the business afloat and profitable after.
Crowdfunder is a place where those who seek financing and those who are eager to provide it meet.
It deals with almost any industry, business category, and deal type (although, it mainly specialises in selling shares).
There are different pricing plans, each for certain business needs – preparing a crowdfunding campaign or leveraging a network of investors.
Alongside the base services, Crowdfunder offers extra services – data analytics, newsletter templates and ad campaigns.
SeedInvest is a real tidbit for early-staged companies and startups.
The platform has a set of strict rules for the vetting procedures and accepts only 1% of startups.
By offering micro-loans ($500), the platform allows non-accredited investors to support projects they fancy.
Since its foundation, SeedInvest has helped 150+ startups get funding, and 250K+ investors augment their capital.
MicroVentures is another platform from this niche.
Dealing with creators and small-sized backers, the company has already created over 250 investment opportunities and run $100M+ in transactions.
Also, MicroVentures is a good option if your aim is reselling investments as they have a built-in secondary market.
Among the top features of MicroVentures are deal flow (chance to invest alongside VC firms and angels), access to the market (min investment size – $100), and professional support (Investor Relations Associates team).
Now it’s time to look at the companies who weren’t suffering from making the choice equity investment vs. debt investment and decided to occupy both niches.
Realty Mogul operates in the property sector, offering both real estate investment trusts (REITs) and private real estate opportunities.
Being oriented towards individuals and institutions, Realty Mogul grounds its business on two models – p2p loans and equity financing.
The projects financed via the website include office and retail space, apartment buildings.
Realty Mogul conducts its due diligence by meeting with potential clients, analysing legal and financial aspects, investigating the property.
On its official website, CircleUp states that they provide loans, equity and the mix of these two models to cater to the needs of clientele.
If you’re interested in crowdlending via CircleUp, consider the below details:
- no hidden fees;
- average loan size $20K – $3M;
- free exit with no penalties;
- all-in APR – 14%-25%.
A great thing about CircleUp is that they apply machine learning technology to analyse different aspects of projects: their financial performance, brand, product, distribution, team, and, as a result, evaluate them more effectively.
Our project for the crowdfunding market
Among the clients who we helped with investment website development, there are several UK-based companies raising funds for real estate projects through the wisdom of the crowd.
If you’re dreaming about supporting a property developer but still hesitate on debt vs. equity investments, check a short overview of the companies we collaborate with.
CapitalRise is a top crowdfunding platform for prime property projects. It deals with professional real estate developers, sophisticated and everyday investors.
CapitalRise has two kinds of products – equity and debt.
Debt products come in the form of interest-bearing bonds and deep discount bonds which differ in how the return on the investment is classified and whether or not it requires tax deduction.
Equity products are designed for developers who don’t have a fixed rate of return and can be bought in the form of shares released by the SPV.
Capital Rise doesn’t charge any investor fees; meanwhile, borrowers have to pay for collecting funds.
Shojin is a group of property investment experts who invest alongside their clients in each project.
The company doesn’t make you choose “debt instrument vs. equity instrument as you can either become a shareholder in the SPV or buy the bonds it issues.
The platform works as follows:
- Shojin handpicks investment opportunities that undergone tough due diligence procedures and present them on the website.
- For each project, they create an SPV so that investors can become its share or bondholders.
- Once investments are made, Shojin observes their status and keep backers updated.
- At the end of campaigns, all the properties are sold, and investors get profits.
Knowing the difference between debt and equity instruments, their pros and cons, Homegrown decided to build their activity on the latter model.
The platform offers 13.4% p.a. on investments in intelligent property campaigns.
For those projects selected for fundraising, Homegrown creates the SPV issuing shares for investors and giving them voting rights.
Each investment is carefully monitored, and the company provide backers with updates permanently.
Homegrown in numbers:
- 10 projects funded with £225m gross development value;
- 5% deal origination fee;
- 15% of profit share.
Let us introduce a quite powerful player on the alternative lending for the property market — Glenhawk.
Founded in 2017, the company has already demonstrated amazing records:
- total lent to date is £111,327,200;
- the total number of loans —163.
Recently Glenhawk announced its ambitions to grow its UK loan book to £200 million by the end of 2021. Of course, to do this single-handedly is almost impossible, so they enlisted J.P. Morgan’s help.
Glenhawk stands out of the crowd. Having a strong capital base to lend, it helps those looking to buy a new property, start property investment or refurbishment.
Their product portfolio includes residential, commercial, refurbishment, and 2nd charge bridging loans.
Consider Glenhawk when choosing between debt vs. equity investing scenarios.
Forus and LenderKit
Aware of the challenges platform owners face, in particular those related to portal development, we’ve designed a ready-made solution.
LenderKit is an enterprise-level white-label crowdfunding software. It lets you build a debt investment and equity investment platform quite fast and with endless room for customisation.
It has everything needed to jumpstart from the ground zero: responsive design themes, user-friendly dashboards, powerful back-office, integrated KYC/AML checks and secondary market.
Forus is the company focused on providing business loans and investment opportunities for SMEs and equity investor vs. debt investors in the Kingdom of Saudi Arabia.
The online platform is based on LenderKit. Since the company was a pioneer on their local market, they had to meet all the requirements of the Saudi Arabian Monetary Authority (SAMA) set towards online fundraisers.
The default functionality of LenderKit covered only a part of the requirements, so we extended it to meet Forus needs.
Difference between debt and equity bottom line
In case the line between debt vs. equity investment is still blurred to you, it’s always a good idea to consult with a professional and complement your basic understanding of the essentials.