You have a business project that will need funding. You go to a friend or a business associate, and they agree to help you with the project. Fast forward a few years later—the project was not as successful as planned. Your friend wants their money back, but you didn’t recall them ever loaning you money–they invested in the (now failed) business with you.
Does it Matter?
The difference between whether money is a loan which must be paid back and an investment can be a crucial difference, as it can be the difference between being paid back or not.
If you are the one paying the money back, you may want money to be an investment to avoid having to pay money back if the business goes under. Of course, if your business thrives, it may be more expensive to pay back on the investment than it would have been to simply repay a loan and walk away from further obligations.
Either way, you may not get a choice—the money is a loan or an investment, and you can’t decide later on which one you want it to be based on which is better for you.
How Can You Tell the Difference?
Normally, with a written document, it is obvious from the terms of the document whether the money was intended as a loan or an investment.
But often, people don’t put things in writing, and a dispute arises. How do you know whether money given was given as a loan with an intention of repayment or not?
One very significant difference is whether there is an obligation to pay back interest. Interest is almost always an indication of a loan. And if there is an interest obligation, and thus a loan, the loan will have to comply with usury laws to make sure that an illegal rate of interest is not being charged.
Loans also will have an end date–that is, the date when the loan must be repaid. They also could have (but they don’t necessarily have to have) interim installment type payments, which an investment wouldn’t require.
The installment payments will usually be for about the same amount of money, on a periodic (monthly, twice a month, etc.) basis. Contrast this with an investment, where the payment to the investor will vary both in time and in amount.
If repayment is based on how the business does, the money could be seen as an investment. Investments will pay off or not pay off, depending on how the business does. The loan will be due no matter what or how well the business does.
Remember that larger investments may involve federal securities paperwork to be filed, although everyday, smaller investments on a business do not.
Paperwork and Agreements
The most foolproof way to avoid this problem is to include in any paperwork that money is given as one or the other–even if it seems like it is obvious, and even if there is a verbal understanding one way or the other.
Call the West Palm Beach business litigation attorneys at Pike & Lustig today to make sure your investments and loans are safe, and done correctly.
By Michael Pike and Daniel Lustig | Posted on February 14, 2022
FAQs
Loans are amounts of money that must be repaid, while investments are monies spent to hopefully return a profit. Learn the key features of accounting paperwork for both loans and investments and how they both appear in a real-world example.
What are the differences between loan and investment? ›
Unlike a loan, an investment denotes a degree of ownership or stake in the venture, and the investor may share in the profits or losses. LOAN - In a loan, the lender does not gain ownership or control over the borrower's business. The lender is entitled to repayment of the principal amount and interest only.
What is the difference between a loan and an investment group of answer choices? ›
Loans are moneys borrowed from a bank or financial institute repayable along with an interest rate within a fixed amount of time. Investments are purchases made in anticipation of future gains or profits. Therefore, while loans are liabilities, investments are assets.
What is the difference between a loan and an investment security? ›
The main difference between loans and investment securities is that loans are generally acquired through a process of direct negotiation between the borrower and lender, while the acquisition of investment securities is typically through a third-party broker or dealer.
What is the difference between lend and invest? ›
Firstly, we need to acknowledge the differences between a lender and an investor. A lender does exactly what the word says-they lend you money that you must pay back, usually with interest. An investor puts money into a business, projects, schemes, ideas and so on, with the expectation of having a stake in the profits.
What is the difference between interest and investment? ›
Capital refers to the money an investor put into a company as his investment. Interest is the return you earn if you provide a loan to the company instead of making the loan a capital.
What is the difference between investment and investment banking? ›
Investment management is all about investment decisions and asset allocation. This means developing investment strategies and directing funds to property, equities, or debt securities on behalf of clients. Investment bankers, by contrast, are deal-makers.
What is the difference between invest and investment? ›
The act of investing has the goal of generating income and increasing value over time. An investment can refer to any mechanism used for generating future income. This includes the purchase of bonds, stocks, or real estate property, among other examples.
What is the difference between loans and interest? ›
An interest rate is the cost you pay to the lender for borrowing money to finance your loan, on top of the loan amount or your principal. The higher the interest rate, the more you'll pay over the life of your loan.
What is the difference between credit and investment? ›
The investment decision must consider the full spectrum of risk and return, from losing everything to generating a handsome return. Alternatively, the credit decision is a subset of the investment analysis that considers only a limited range of risk and return possibilities.
Loans are not typically classed as debt securities, as they tend to have a lower interest rate. While a bank loan is a non-negotiable financial instrument, debt security usually has a more flexible interest rate, including fixed, floating, or zero coupons.
What's an investment loan? ›
Investment property loans are used for the purchase of second homes and investment properties, including one- to four-unit residential properties and vacation properties.
What is difference between loan and borrow? ›
For example, someone might ask, “Can you borrow me some money for a few days?” This is a non-standard way to use borrow. A good way to avoid this error is to remember that borrow means to take, while lend and loan mean to give.
What is difference between lend and borrow? ›
'Lend' means to give something to someone to be used for a period of time and then returned. 'Borrow' means to take and use something that belongs to someone else for a period of time and then return it.
Do banks lend or borrow money? ›
Banks are intermediaries between depositors (who lend money to the bank) and borrowers (to whom the bank lends money). The amount banks pay for deposits and the income they receive on their loans are both called interest.
Are investors better than loans? ›
Investors may be better suited to provide large sums of capital. Banks are leery of lending very large sums because of the risk of default. Repayment terms are more flexible than that of business loans. Depending on the investor, you may have a built-in mentoring and business advising network to help your business.
What are two differences between banks and investment companies? ›
The difference between commercial banking vs. investment banking is that investment banks typically raise money by selling securities (like stocks and bonds). On the other hand, commercial banks use consumer deposits to fund loans and mortgages, and the interest on those loans becomes profit for the bank.
Is it better to take loan and invest? ›
Even in cases where you are allowed to use the proceeds for investing, it may not be wise to do so. Investing comes with risks, including the potential that you could lose the money entirely. This type of outcome could put you in a difficult situation if you intend to use investment proceeds to repay the loan.
