For early-stage businesses, cash is king. However, cash is also thin on the ground. Amidst the mammoth work of building a business, you’ll need to consider creative ways of securing finances - without incurring piles of paperwork. Enter: the Convertible Loan Note.
A convertible loan note is particularly handy for businesses seeking to raise funds, with an equity investment in mind. Unlike a conventional investment round, a convertible loan note can be seen as a loan that bears interest and is repayable in the future via issuing equity in the business. Essentially, a Convertible Loan Note is a loan that will ultimately convert into shares for an investor.
When to use a convertible loan note
Early-stage funding
As you bootstrap the business, you’ll need cash to keep things flowing. A Convertible Loan Note can provide a quick injection of cash, without reams of paperwork to contend with. A Convertible Loan Note is particularly handy for businesses as it does not give away equity, which in turn avoids dilution and giving away rights (until the Convertible Loan Note converts).
Attract investors
Convertible Loan Notes are a particularly attractive option for investors. In their design, investors are protected in the event of insolvency, and - if things instead go to plan - investors enjoy shares at an often discounted rate.
Position potential of the business
The use of a Convertible Loan Note can signal to other investors the potential of your business. While it might not be the time for an investment round, a Convertible Loan Note can go towards building investor confidence that your business is one for the long haul.
SEIS/EIS Relief
It’s worth noting, that Convertible Loan Note agreements are not eligible for SEIS/EIS relief. If that’s something your potential investors are after, you’ll need to consider alternative means of raising funds, such as an Advance Subscription Agreement. However, while SEIS/EIS relief is off the table, a Convertible Loan Note offers more protection for investors than equity investment.
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