What are convertible loan notes?

Just one scheme in Britain assisted in the completion of £1.14 billion in convertible loan notes across 1,190 companies. If you want to find out what convertible loan notes are, how they can benefit your business, and how to access them, read on. 

What are convertible loan notes?

Let’s say your start up or small business needs funds, but your company is still too early in its lifecycle to enter into a valuation effectively, and you would like to find some kind of solution that doesn’t involve immediately taking on traditional debt upfront. 

A convertible loan note sits somewhere between debt financing and equity financing. Rather than selling a portion of your business today, or taking out standard debt financing in the form of a business loan, you receive a loan from an investor. That loan then converts into ownership on the investors part later, usually when your business gains more funding. That’s why it’s called convertible – it starts as a loan, but can turn into equity finance at a later date. 

How are convertible loan notes used? 

Convertible loan notes are used primarily during the early stages of growth when getting a business valuation can be more tricky and your business may not have a track record of financial repayments on which to lean during loan applications. 

While some startups bootstrap their way to success, many rely on funding during the early years to onboard team members, pay for equipment, buy stock, or establish a company premises. A convertible loan note can be used to help fuel that growth without taking on traditional debt through a bank or financial institution, or selling a portion of the business early on. 

The pros of convertible loan notes

There are several ways convertible loan notes can benefit your business. Here are a few.  

Less need for valuation 

If you’re running a startup or small business in the initial stages of growth and have come up against some difficulties with getting a valuation done that you feel effectively reflects your business, a convertible loan note could help you gain access to financing without the need for the valuation. 

Less expensive 

The interest rates associated with convertible loan notes can be lower than those common with debt financing. However, do be aware that this depends on the type of debt financing – there are many types of business loans that come with reduced rates, for instance, asset finance and secured loans can have lower rates than those that come with unsecured loans and short term business loans. 

Access financing between funding rounds 

A convertible loan note can be a helpful way to access finance while you’re between funding rounds. For instance, if you’re running low on funds but you need to ensure you’re able to pay suppliers and employees for a few more months as you work to attract Series A investors, a convertible loan note could help you maintain your working capital levels as you work to close the deal. 

The disadvantages and drawbacks of convertible loan notes

Convertible loan notes, like equity finance, can dilute ownership, meaning you could own less of your business and need to distribute more of future profits. If, however, the next funding round is not as successful as you and the investor hoped, you may need to repay the loan in cash, which could present a strain on your finances. 

How to apply for convertible loan notes

To gain access to convertible loan notes, you would likely need to find an investor who is willing to use this hybrid model rather than simply putting up equity finance. A business plan and cash flow projections can help you demonstrate to the investor how much they could hope to gain. Be sure both you and the investors are fully aware of the exact terms of your agreement, including what will happen if you don’t raise the predicted amount during the next funding round. 

Find a business loan with Funding Options by Tide

While convertible loans aren’t common, if you do decide you’d like to access funding through debt financing, we may be able to help. We connect eligible borrowers to our network of over 120 lenders offering between £1,000 and £20 million. 

We help our customers find business financing options that suit their unique needs, whether that’s asset finance to fund the purchase of new equipment, a working capital loan to bridge cash flow gaps, or a bridging loan to help finance the purchase of a property. Just click the link below and submit details about your business to find out if you’re eligible. 

Find a business loan.

Please note that the information above is not intended to be financial advice. You should seek independent financial advice before making any decisions about your financial future.

It’s important to remember that all loans and credit agreements come with risks. These risks include non-payment and late-payment of the agreed repayment plan, which could affect your business credit score and impact your ability to find future funding. Always read the terms and conditions of every loan or credit agreement before you proceed. Contact us for support if you ever face difficulties making your repayments.

Funding Options, now part of Tide, helps UK firms access business finance, working directly with businesses and their trusted advisors. Funding Options are a credit broker and do not provide loans directly. All finance and quotes are subject to status and income. Applicants must be aged 18 and over and terms and conditions apply. Guarantees and Indemnities may be required. Funding Options can introduce applicants to a number of providers based on the applicants' circumstances and creditworthiness. Funding Options will receive a commission or finder’s fee for effecting such finance introductions.