Alternative Credit - Speculating or Investing?

During the AltFi Income Opportunities Alternative Credit Conference yesterday, one of the speakers suggested that Risk when investing in Alternative Credit should not be thought of as return on capital but return of capital.

The wording is subtle yet there is a powerful difference.

First, some definitions.

Return  ON capital measures the return that an investment generates for the investor

i.e. the interest rate agreed with the borrower for the provision of that credit

whilst

Return OF capital is when an investor receives their original investment back plus the income from the investment.

i.e. how is the borrower making that regular interest payment and how will they repay the loan.

Investing into alternative credit backed by income producing commercial property provides investors with transparency on both risk factors.

Firstly, how the borrower is able to make the regular interest payments from their tenants rental income (interest cover ratio and tenant covenant being the crucial metrics) and secondly, there is a physical asset which can be sold in order to redeem the loan (the LTV of the loan being the crucial metric).

Understanding how both of these risks can be mitigated is the difference between speculating and investing.

Brian Bartaby is the Founder & CEO of Proplend , a P2P Platform specialising in sub ￡5m commercial property debt. The views above are my own and not a representation of Proplend or any other platform. Investors' capital is at risk.