You need to incentivize investment

Individual investors are looking for places to invest their money where they can be assured that they will receive the most return for the least amount of risk. If one wants to find funding for their project, they need to offer to pay an attractive enough interest rate at a low enough risk. These two factors often balance each other, where a lower risk can lead to a lower interest rate and visa versa.

Reducing risk of investment comes in different forms:

• collateral available from the lender or a third party
• government guarantees of repayments and recourse
• assurances or ratings available beforehand with explanations of why the ratings are at their level
• methods to account for losses due to the intermediary steps to the funding such as currency fluctuation and insolvent originators or insurers.

The most common methods to handle these risks for the investors involve, currently, legal repercussions. In the current system, a government entity is required to step in and enforce a written contract that was agreed to before the investment was made. This enforcement can be brought to a court system and the final enforcement comes in the form of seizing assets through force or financial institutions redistributing the assets involved to correct the situation according to legal mandates.

However, centralized, government enforcement is not always fair and can be imperfect. Enforcement may not only fail to be carried out correctly but may also take an extended amount of time. Extended amounts of time in the existing legal system in many countries means high costs for the parties involved and can lead to imbalances in how the corrections are carried out. These imbalances may occur in the case of certain parties being capable of affording higher legal costs the other parties cannot afford.

In addition, the government parties may have a bias, not be capable of handling the sophistication of the transaction or move excessively slow for the sake of the parties involved in the transaction. There lies the risk of major changes in policy and leadership that can lead to changes in how the agreements are enforced or even lead to absolute removal of property or rights of repayment. The current system allows for an inherent level of uncertainty for investors. These actions and events are justified at the moment by governments and often by their constituents due to specific circumstances. It can be like a gang of kids on a playground picking on one other kid and taking away their lunch money while the teacher finds a way to justify their actions.

All these are inherent risks that potential investors weigh in their decision making before locking up their money in someone else’s project or property. If these risks are reduced or eliminated, not by promises from entities but by foolproof methods, the investor will be more likely to enter into the lending agreement and will do so at a lower cost to the borrower. This is how one can further convince investors to loan you necessary funds.