Debt (Peer to Business Lending) vs. Equity Investment

Overview:

Peer to Peer lending has been around for a while. This form of microlending was popularized by LendingClub and Prosper with simple enough mechanics: Borrower applies for credit on these platforms -> The platform (LC or Prosper) does their own due diligence if the borrower is viable credit risk -> request gets posted on their proprietary platform. At this juncture, “Peer” investors can pool money and fund the loan. The magic is happening on the efficiency of connecting borrowers with lenders and there by taking out the traditional banks as intermediaries (What happens to savings accounts? Banks used to lend that money to then earn savers interest! except now that just pays less than 1%)

Real Estate “Crowdfunding” Platforms:

There are also a host of real estate crowdfunding platforms that focus on house flippers (Realtyshares, Groundfloor) or a more commercial real estate (Fundrise, Realtymogul etc). Some are pure debt based and others a hybrid of debt financing or equity holds. Bottom line is this: they offer investors an opportunity to invest in loans secured by underlying real estate or equity opportunities. It should be noted that in the case of “fix and flip” investments, there is usually lack of inflow of cash (after all the borrower is borrowing to fix the house and then flip and after that pay out the investors). Monthly cash flows in such deals are no guarantees. By comparison, rental income on commercial real estates offers a stable cash flow; at least a bit more reassuring.

These opportunities are backed by an asset or collateralized vs. consumer debt funding at LendingClub or Prosper which is NOT secured – with an unsecured loan, the debt obligation is not collaterlized by a lien and thus lenders will have little to no recourse if the borrower fails to timely pay interest.

Reamerge:

At Reamerge, an investor is lending directly to an ESTABLISHED, CASH FLOW POSITIVE, business WITH an underlying real estate asset as collateral. This is much different than “real estate crowdfunding” where usual deals include house flippers, or a commercial shopping strip etc. At Reamerge you are participating in Peer to Business lending (P2B). This has many advantages:

1. Investing in cashflowing businesses with yearly net profits and a hard asset (the property of the business) as collateral for a sort of “double” security.

2. From a real estate capital structure’s perspective, debt investors have the least risk and are first to be repaid. In contrast, equity investors take on the most risk and are last to be repaid with potential for lowest return on the collateral.

We made a short infographic as a summary on debt vs equity investment – check it out!

We will further explore the P2B concept, comparison with other asset classes, and our borrower criteria in the upcoming blog posts. Please leave comments. In the meantime, if you have any questions, please reach out at info@reamerge.com

Intro Diff Debt vs Equity

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