Debt projects
What is it?
These are investment projects in which investors provide capital in the form of loans or debt. These projects involve the payment of periodic interest and the repayment of the loaned capital within a specified time frame. Debt projects are often secured by the borrower’s assets (secured loan), which offers some assurance to investors. This type of investment is common in the real estate sector, where real estate developers may turn to debt to finance the construction or acquisition of properties.
The primary objective of debt projects is to generate stable income through the interest payments made by the borrower. Debt investors typically receive regular payments throughout the life of the loan, providing them with a constant cash flow, in addition to the return of the capital at the loan’s maturity.
Key aspects to consider
When investing in debt projects, it is important to evaluate the associated risks, such as the borrower’s ability to meet payments. The borrower’s solvency and the quality of the collateral offered are key factors in determining the risk level of this type of investment.
It is also crucial to consider the expected return, which is typically based on the agreed-upon interest rate. Debt projects offer more predictable returns compared to equity investments, but, in exchange, they do not provide the same opportunity to participate in the growth or appreciation of the underlying assets.
Additionally, investors should consider the terms and conditions of the loan, such as its duration, the interest rate (fixed or variable), and the offered collateral. Default by the borrower could result in the enforcement of the collateral and the recovery of capital, but there is always the risk of not achieving the expected return if the project does not unfold as planned.