4 ms·

If you make a loan, you're still entitled to repayment plus interest--equity can just go to zero. Creditors get repaid out of bankruptcy before shareholders do.

• jondubois 7y ago
  If being the first in line to collect the proceeds of liquidation in case of bankruptcy is the only advantage of loaning vs investing, then it still doesn't seem like a very strong case to me. >> a business might not want to hand over ownership In terms of not wanting to hand over control; a business could achieve this by issuing non-voting shares. In terms of actual ownership, I don't think it makes sense for an economic entity to give or loan money to a venture unless they understand or at least believe in the venture - Ownership is the best way to demonstrate that belief. Debt may be a way to commoditize the funding process but this doesn't make sense begin with - Money loaned by bankers on the basis of broad statistical probabilities cannot outperform money invested by investors on the basis of deep understanding of the market and business domain. If the economy ran more on debt, we'd end up with fewer well informed investors and more poorly informed bankers. The economy would be much less efficient.