Loan notes are a flexible and popular way for businesses in England to raise money. They are used in many situations, from day-to-day corporate financing to complex deals like mergers and acquisitions. In this guide, we explain what loan notes are, how they work, and how they could help your business.
What are loan notes?
Loan notes are a type of borrowing. They enable businesses to raise funds without relinquishing ownership or equity. In simple terms, your business borrows money and agrees to pay it back later, often with interest. Some loan notes can even be converted into shares in the company, allowing investors to benefit from its growth.
Key features of loan notes
• Interest payments: Loan notes usually include regular interest payments, giving investors a steady income.
• Repayment terms: Typically, there is a set date by which the loan must be repaid, although early repayment may be possible.
• Convertible or non-convertible: Some loan notes can be converted into shares, offering extra flexibility.
• Secured or unsecured: Loan notes may be backed by assets (secured) or not (unsecured), which affects the level of risk associated with them.
How businesses use loan notes
1. Raising capital without giving away control: Loan notes enable businesses to raise funds while maintaining full control. This can be useful for growth, buying equipment, or managing cash flow. We often help small and medium-sized businesses use loan notes as part of their funding strategy.
2. Mergers and acquisitions (M&A): Loan notes are commonly used in M&A deals. They can form part of the payment to sellers, allowing buyers to spread costs over time. Convertible loan notes can give sellers a chance to benefit from the future success of the business they are selling.
3. Private equity and start-up funding: Investors, including private equity firms and venture capitalists, often use loan notes to fund early-stage businesses. This approach can delay setting a business valuation until later, when the company is more established. Convertible loan notes are especially useful here.
4. Property and real estate development: Loan notes are also used to fund property developments. The loan is often secured against the property, which gives investors reassurance. This can help developers raise the money needed to complete projects.
5. Debt restructuring: Businesses facing financial challenges may use loan notes as part of a plan to manage or restructure their debts. Loan notes can help free up cash and give businesses time to recover.
What are the risks?
While loan notes offer flexibility, they also carry risks. Businesses need to be confident they can meet repayment terms. Investors must understand the financial health of the company they are lending to. Convertible loan notes also carry the risk of ownership dilution if converted into shares. Read our article – Advantages and disadvantages of loan notes
We’re here to help
Our corporate and commercial law team at Tees has wide experience advising businesses on loan notes. Whether you are looking to raise capital, fund an acquisition, or restructure debt, we can help you assess your options and put the right agreements in place. If you would like to speak to one of our experts for a confidential, no-obligation chat about loan notes and your business, please get in touch.
