A delicious description of different debt-based investments
In September 2017, we announced we would start offering bonds and loan notes alongside our P2P investments. Whilst all three types of investments are debt-based, there are some differences between them. We’ve put together a really quick guide (using cake!) aiming to help you understand these differences and the role that each type of investment could play in your portfolio.
The differences between Loan Notes, Bonds and P2P investments
Crowdstacker has one main goal – to match British businesses looking to raise funds for development or expansion, with investors looking to invest their money.
Specifically for investors we want to provide the three key elements that investors tell us they want, namely fixed income, tax efficiency and the ability to know where and how the invested money is being used.
We also want to be able to offer flexibility and a diversity of investment types that could complement your portfolio.
So where does the cake come in?
We’re going to explain the differences between these types of debt-based investments by thinking of them as cakes.
To start let’s think of Bonds as a large Victoria sponge, which has been cut into small equal slices.
When you invest in, or ‘subscribe to’, a bond, you are in effect buying one or more of these slices. Each investor receives exactly the same type of cake - the same interest rate, the same term for the loan, and all the same features such as security - and there are a limited number of ‘slices’ to be had.
The bonds themselves are basically an I.O.U. For example, a Government or company borrows money for a fixed period and promises to pay it back with interest.
Loan Notes are also a Victoria sponge
Bonds and Loan Notes are very similar, but there are some key differences.
Whilst Bonds and Loan Notes can both be thought of as whole Victoria sponges, the Loan Note cake has not already been cut into even sized slices.
Loan Note Investors can cut their own slices depending on how much they would like.
But, as with Bonds, everyone still receives the same type of cake (i.e. the term, rate and features are fixed). Our new Loan Note investment is here.
Both types of investments act as an I.O.U from one party to another. However, they are each structured a little differently. Bonds are fixed slices and there are a predetermined amount of bonds available, whereas with Loan Notes you decide exactly how small or large your slice will be. In reality, you still choose the exact amount of money you wish to invest and so you won't see much difference between a Bond and a Loan Note in this respect.
So, what kind of cake is a P2P loan?
Continuing our cake analogy, we could say that P2P loans are more like cupcakes.
The borrowing business, or sponge, is the same but the features of each ‘cupcake’ can be very different, with different toppings, different sizes and so on. With P2P Loans investors can be offered the opportunity to pick how long they invest for, there may be a choice of interest rates, and when the interest is paid.
Crowdstacker is offering P2P loans such as this one for Authentic Alehouses.
Why provide a choice of investments?
Bonds, Loan Notes and P2P loans all offer investors slightly different ways to invest their money, and they offer businesses slightly different ways to borrow money.
It might suit one business better to borrow money only for one specified time, for example two years. After which they know they may not need to borrow money any more, or they might be able to access more favourable borrowing terms at that point.