The Differences Between A Loan And An Investment

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.